10-K 1 d308837d10k.htm FORM 10-K Form 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016, or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-7724

 

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

Delaware   39-0622040
(State of incorporation)   (I.R.S. Employer Identification No.)

 

2801 80th Street, Kenosha, Wisconsin   53143
(Address of principal executive offices)   (Zip code)

(262) 656-5200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common stock, $1.00 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☒  No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☒    Accelerated filer  ☐    Non-accelerated filer  ☐    Smaller reporting company  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The aggregate market value of voting and non-voting common equity held by non-affiliates (excludes 503,411 shares held by directors and executive officers) computed by reference to the price ($158.00) at which common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (July 2, 2016) was $9.1 billion.

The number of shares of Common Stock ($1.00 par value) of the registrant outstanding as of February 3, 2017, was 57,970,318 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates by reference certain information that will be set forth in Snap-on’s Proxy Statement, which is expected to first be mailed to shareholders on or about March 10, 2017, prepared for the Annual Meeting of Shareholders scheduled for April 27, 2017.

 

 

 


Table of Contents

 

 

 

TABLE OF CONTENTS

 

              Page  
PART I   
 

Item 1

  

Business

     4   
 

Item 1A

  

Risk Factors

     12   
 

Item 1B

  

Unresolved Staff Comments

     19   
 

Item 2

  

Properties

     19   
 

Item 3

  

Legal Proceedings

     21   
 

Item 4

  

Mine Safety Disclosures

     21   
PART II   
 

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21   
 

Item 6

  

Selected Financial Data

     25   
 

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   
 

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risk

     54   
 

Item 8

  

Financial Statements and Supplementary Data

     56   
 

Item 9

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     56   
 

Item 9A

  

Controls and Procedures

     56   
 

Item 9B

  

Other Information

     58   
PART III   
 

Item 10

  

Directors, Executive Officers and Corporate Governance

     58   
 

Item 11

  

Executive Compensation

     59   
 

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     59   
 

Item 13

  

Certain Relationships and Related Transactions, and Director Independence

     60   
 

Item 14

  

Principal Accounting Fees and Services

     60   
PART IV   
 

Item 15

  

Exhibits, Financial Statement Schedules

     60   
 

Item 16

  

Form 10-K Summary

     60   

Signatures

     110   

Exhibit Index

     112   

Computation of Ratio of Earnings to Fixed Charges

     115   

Consent of Independent Registered Public Accounting Firm

     119   

Certifications

     120   

 

 

 

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PART I

Safe Harbor

Statements in this document that are not historical facts, including statements that (i) are in the future tense; (ii) include the words “expects,” “plans,” “targets,” “estimates,” “believes,” “anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”) or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-on’s or management’s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in this Annual Report on Form 10-K, particularly those in “Item 1A: Risk Factors,” could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.

These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain value through its Snap-on Value Creation Processes, including its ability to realize efficiencies and savings from its rapid continuous improvement and other cost reduction initiatives, improve workforce productivity, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and/or lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby help improve their sales and profitability, introduce successful new products, successfully pursue, complete and integrate acquisitions, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, the effects of external negative factors, including adverse developments in world financial markets, weakness in certain areas of the global economy (including as a result of the United Kingdom’s vote to exit the European Union), and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, changes in tax rates and regulations, and the impact of energy and raw material supply and pricing, including steel and gasoline, the amount, rate and growth of Snap-on’s general and administrative expenses, including health care and postretirement costs (resulting from, among other matters, U.S. health care legislation and its ongoing implementation or reform), continuing and potentially increasing required contributions to pension and postretirement plans, the impacts of non-strategic business and/or product line rationalizations, and the effects on business as a result of new legislation, regulations or government-related developments or issues, risks associated with data security and technological systems and protections, and other world or local events outside Snap-on’s control, including terrorist disruptions. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law.

In addition, investors should be aware that generally accepted accounting principles in the United States of America (“GAAP”) prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.

Fiscal Year

Snap-on’s fiscal year ends on the Saturday that is on or nearest to December 31. Unless otherwise indicated, references in this document to “fiscal 2016” or “2016” refer to the fiscal year ended December 31, 2016; references to “fiscal 2015” or “2015” refer to the fiscal year ended January 2, 2016; and references to “fiscal 2014” or “2014” refer to the fiscal year ended January 3, 2015. Snap-on’s 2016 and 2015 fiscal years each contained 52 weeks of operating results; Snap-on’s 2014 fiscal year contained 53 weeks of operating results. References in this document to 2016, 2015 and 2014 year end refer to December 31, 2016, January 2, 2016, and January 3, 2015, respectively.

 

 

 

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Item 1: Business

Snap-on was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks. Products and services include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as for customers in industries, including aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation and technical education. Snap-on also derives income from various financing programs designed to facilitate the sales of its products and support its franchise business.

Snap-on markets its products and brands worldwide through multiple sales distribution channels in more than 130 countries. Snap-on’s largest geographic markets include the United States, Europe, Canada and Asia/Pacific. Snap-on reaches its customers through the company’s franchisee, company-direct, distributor and internet channels. Snap-on originated the mobile tool distribution channel in the automotive repair market.

The company began with the development of the original Snap-on interchangeable socket set in 1920 and subsequently pioneered mobile tool distribution in the automotive repair market, where fully stocked vans sell to professional vehicle technicians at their place of business. Today, Snap-on defines its value proposition more broadly, extending its reach “beyond the garage” to deliver a broad array of unique solutions that make work easier for serious professionals performing critical tasks. The company’s “coherent growth” strategy focuses on developing and expanding its professional customer base in its legacy automotive market, as well as in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high. In addition to its coherent growth strategy, Snap-on is committed to its “Value Creation Processes” – a set of strategic principles and processes designed to create value and employed in the areas of (i) safety; (ii) quality; (iii) customer connection; (iv) innovation; and (v) rapid continuous improvement (“RCI”). Snap-on’s RCI initiatives employ a structured set of tools and processes across multiple businesses and geographies intended to eliminate waste and improve operations. Savings from Snap-on’s RCI initiatives reflect benefits from a wide variety of ongoing efficiency, productivity and process improvements, including savings generated from product design cost reductions, improved manufacturing line set-up and change-over practices, lower-cost sourcing initiatives and facility consolidations.

Snap-on’s primary customer segments include: (i) commercial and industrial customers, including professionals in critical industries and emerging markets; (ii) professional vehicle repair technicians who purchase products through the company’s worldwide mobile tool distribution network; and (iii) other professional customers related to vehicle repair, including owners and managers of independent and original equipment manufacturer (“OEM”) dealership service and repair shops (“OEM dealerships”). Snap-on’s Financial Services customer segment includes: (i) franchisees’ customers and certain other customers of Snap-on who require financing for the purchase or lease of tools and diagnostics and equipment products on an extended-term payment plan; and (ii) franchisees who require financing for business loans and vehicle leases.

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships, through direct and distributor channels. Financial Services consists of the business operations of Snap-on Credit LLC (“SOC”), the company’s financial services business in the United States, and Snap-on’s other financial services subsidiaries in those international markets where Snap-on has franchise operations. See Note 18 to the Consolidated Financial Statements for information on business segments and foreign operations.

 

 

 

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Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

Recent Acquisitions

On November 16, 2016, Snap-on acquired Ryeson Corporation (d/b/a Sturtevant Richmont) for a preliminary cash purchase price of $12.9 million (or $12.5 million, net of cash acquired). The preliminary purchase price is subject to change based upon the finalization of a working capital adjustment that is expected to be completed in the first quarter of 2017. Sturtevant Richmont, based in Carol Stream, Illinois, designs, manufactures and distributes mechanical and electronic torque wrenches as well as wireless torque error proofing systems for a variety of industrial applications. The acquisition of Sturtevant Richmont enhanced and expanded Snap-on’s capabilities in providing solutions that address torque requirements, which are increasingly essential to critical mechanical performance. For segment reporting purposes, the results of operations and assets of Sturtevant Richmont have been included in the Commercial & Industrial Group since the acquisition date.

On October 31, 2016, Snap-on acquired Car-O-Liner Holding AB (“Car-O-Liner”) for a preliminary cash purchase price of $151.8 million (or $147.9 million, net of cash acquired). The preliminary purchase price is subject to change based upon the finalization of a working capital adjustment that is expected to be completed in the first quarter of 2017. Car-O-Liner, headquartered in Gothenburg, Sweden, designs and manufactures collision repair equipment, and information and truck alignment systems. The acquisition of Car-O-Liner complemented and increased Snap-on’s existing equipment and repair and service information product offerings, broadened its established capabilities in serving vehicle repair facilities and further expanded the company’s presence with repair shop owners and managers. For segment reporting purposes, substantially all of Car-O-Liner’s results of operations and assets have been included in the Repair Systems & Information Group since the acquisition date, with the remaining portions included in the Commercial & Industrial Group.

On July 27, 2015, Snap-on acquired the assets of Ecotechnics S.p.A. (“Ecotechnics”) for a cash purchase price of $11.8 million. Ecotechnics designs and manufactures vehicle air conditioning service equipment for OEM dealerships and the automotive aftermarket worldwide. The acquisition of the Ecotechnics product line complemented and increased Snap-on’s existing equipment product offering for OEM dealerships and independent automotive repair shops, broadened its established capabilities in serving vehicle repair facilities, and expanded the company’s presence with repair shop owners and managers.

On May 28, 2014, Snap-on acquired substantially all of the assets of Pro-Cut International, Inc. (“Pro-Cut”) for a cash purchase price of $41.3 million. Pro-Cut designs, manufactures and distributes on-car brake lathes, related equipment and accessories used in brake servicing by automotive repair facilities. The acquisition of the Pro-Cut product line complemented and increased Snap-on’s existing undercar equipment product offering, broadened its established capabilities in serving vehicle repair facilities and expanded the company’s presence with repair shop owners and managers.

For segment reporting purposes, the results of operations and assets of Ecotechnics and Pro-Cut have been included in the Repair Systems & Information Group since the respective acquisition dates.

Pro forma financial information has not been presented for any of these acquisitions as the net effects, individually and collectively, were neither significant nor material to Snap-on’s results of operations or financial position.

 

 

 

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Information Available on the Company’s Website

Additional information regarding Snap-on and its products is available on the company’s website at www.snapon.com. Snap-on is not including the information contained on its website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Snap-on’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements on Schedule 14A and Current Reports on Form 8-K, as well as any amendments to those reports, are made available to the public at no charge, other than an investor’s own internet access charges, through the Investor Information section of the company’s website at www.snapon.com. Snap-on makes such material available on its website as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Copies of any materials the company files with the SEC can also be obtained free of charge through the SEC’s website at www.sec.gov. The SEC’s Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549, or by calling 1-800-732-0330. In addition, Snap-on’s (i) charters for the Audit, Corporate Governance and Nominating, and Organization and Executive Compensation Committees of the company’s Board of Directors; (ii) Corporate Governance Guidelines; and (iii) Code of Business Conduct and Ethics are available on the company’s website. Snap-on will also post any amendments to these documents, or information about any waivers granted to directors or executive officers with respect to the Code of Business Conduct and Ethics, on the company’s website at www.snapon.com.

Products and Services

Tools, Diagnostics and Repair Information, and Equipment

Snap-on offers a broad line of products and complementary services that are grouped into three product categories: (i) tools; (ii) diagnostics and repair information; and (iii) equipment. Further product line information is not presented as it is not practicable to do so. The following table shows the consolidated net sales of these product categories for the last three years:

 

     Net Sales  
(Amounts in millions)    2016      2015      2014  

Product Category:

        

Tools

       $   1,899.2               $   1,910.1               $ 1,868.5       

Diagnostics and repair information

     748.2             689.6             689.5       

Equipment

     783.0             753.1             719.7       
  

 

 

    

 

 

    

 

 

 
       $ 3,430.4               $ 3,352.8               $   3,277.7       
  

 

 

    

 

 

    

 

 

 

The tools product category includes hand tools, power tools and tool storage products. Hand tools include wrenches, sockets, ratchet wrenches, pliers, screwdrivers, punches and chisels, saws and cutting tools, pruning tools, torque measuring instruments and other similar products. Power tools include cordless (battery), pneumatic (air), hydraulic and corded (electric) tools, such as impact wrenches, ratchets, screwdrivers, drills, sanders, grinders and similar products. Tool storage includes tool chests, roll cabinets and other similar products. For many industrial customers, Snap-on creates specific, engineered solutions, including facility-level tool control and asset management hardware and software, custom kits in a wide range of configurations, and custom-built tools designed to meet customer requirements. The majority of products are manufactured by Snap-on and, in completing the product offering, other items are purchased from external manufacturers.

The diagnostics and repair information product category includes handheld and PC-based diagnostic products, service and repair information products, diagnostic software solutions, electronic parts catalogs, business management systems and services, point-of-sale systems, integrated systems for vehicle service shops, OEM purchasing facilitation services, and warranty management systems and analytics to help OEM dealerships manage and track performance.

The equipment product category includes solutions for the diagnosis and service of vehicles and industrial equipment. Products include wheel alignment equipment, wheel balancers, tire changers, vehicle lifts, test lane systems, collision repair equipment, vehicle air conditioning service equipment, brake service equipment, fluid exchange equipment, transmission troubleshooting equipment, safety testing equipment, battery chargers and hoists.

 

 

 

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Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs as well as after-sales support for its customers, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on.

Products are marketed under a number of brand names and trademarks, many of which are well known in the vehicle service and industrial markets served. Some of the major trade names and trademarks and the products and services with which they are associated include the following:

 

Names

  

Products and Services

Snap-on

  

Hand tools, power tools, tool storage products (including tool control software and hardware), diagnostics, certain equipment and related accessories, mobile tool stores, websites, electronic parts catalogs, warranty analytics solutions, business management systems and services, OEM specialty tools and equipment development and distribution, and OEM facilitation services

ATI

   Aircraft hand tools and machine tools

BAHCO

   Saw blades, cutting tools, pruning tools, hand tools, power tools and tool storage

Blackhawk

   Collision repair equipment

Blue-Point

   Hand tools, power tools, tool storage, diagnostics, certain equipment and related accessories

Cartec

   Safety testing, brake testers, test lane equipment, dynamometers, suspension testers, emission testers and other equipment

Car-O-Liner

   Collision repair equipment, and information and truck alignment systems

CDI

   Torque tools

Challenger

   Vehicle lifts

Ecotechnics

   Vehicle air conditioning service equipment

Fish and Hook

   Saw blades, cutting tools, pruning tools, hand tools, power tools and tool storage

Hofmann

   Wheel balancers, vehicle lifts, tire changers, wheel aligners, brake testers and test lane equipment

Irimo

   Saw blades, cutting tools, hand tools, power tools and tool storage

John Bean

   Wheel balancers, vehicle lifts, tire changers, wheel aligners, brake testers and test lane equipment

Josam

   Heavy duty alignment and collision repair solutions

Lindström

   Hand tools

Mitchell1

   Repair and service information, shop management systems and business services

Nexiq

   Diagnostic tools, information and program distributions for fleet and heavy duty equipment

Pro-Cut

   On-car brake lathes, related equipment and accessories

Sandflex

   Hacksaw blades, bandsaws, saw blades, hole saws and reciprocating saw blades

ShopKey

   Repair and service information, shop management systems and business services

Sioux

   Power tools

Sturtevant Richmont

   Torque tools

Sun

   Diagnostic tools, wheel balancers, vehicle lifts, tire changers, wheel aligners, air conditioning products and emission testers

TruckCam

   Commercial OEM factory solutions

Williams

   Hand tools, tool storage, certain equipment and related accessories

 

 

 

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Financial Services

Snap-on also generates revenue from various financing programs that include: (i) installment sales and lease contracts arising from franchisees’ customers and certain other customers of Snap-on who require financing for the purchase or lease of tools and diagnostic and equipment products on an extended-term payment plan; and (ii) business loans and vehicle leases to franchisees. The decision to finance through Snap-on or another financing source is solely at the customer’s election. When assessing customers for potential financing, Snap-on considers various factors regarding ability to pay, including the customers’ financial condition, debt-servicing ability, past payment experience, and credit bureau and proprietary Snap-on credit model information, as well as the value of the underlying collateral.

Snap-on offers financing through SOC and the company’s international finance subsidiaries in those markets where Snap-on has franchise operations. Financing revenue from contract originations is recognized over the life of the underlying contracts, with interest computed primarily on the average daily balances of the underlying contracts.

Sales and Distribution

Snap-on markets and distributes its products and related services principally to professional tool and equipment users around the world. The two largest market sectors are the vehicle service and repair sector and the industrial sector.

Vehicle Service and Repair Sector

The vehicle service and repair sector has three main customer groups: (i) professional technicians who purchase tools and diagnostic and equipment products for use in their work; (ii) other professional customers related to vehicle repair, including owners and managers of independent repair shops and OEM dealerships who purchase tools and diagnostic and equipment products for use by multiple technicians within a service or repair facility; and (iii) OEMs.

Snap-on provides innovative tool, equipment and business solutions, as well as technical sales support and training, designed to meet technicians’ evolving needs. Snap-on’s mobile tool distribution system offers technicians the convenience of purchasing quality tools at their place of business with minimal disruption of their work routine. Snap-on also provides owners and managers of repair shops, where technicians work, with tools, diagnostic equipment, and repair and service information, including electronic parts catalogs and shop management products. Snap-on’s OEM facilitation business provides OEMs with products and services including tools, consulting and facilitation services, which include product procurement, distribution and administrative support to customers for their dealership equipment programs.

The vehicle service and repair sector is characterized by an increasing rate of technological change within motor vehicles, vehicle population growth and increasing vehicle life, and the resulting effects of these changes on the businesses of both our suppliers and customers. Snap-on believes it is a meaningful participant in the vehicle service and repair market sector.

Industrial Sector

Snap-on markets its products and services globally to a broad cross-section of commercial and industrial customers, including maintenance and repair operations; manufacturing and assembly facilities; various government agencies, facilities and operations, including military operations; vocational and technical schools; aviation and aerospace operations; oil and gas developers; mining operations; energy and power generation; equipment fabricators and operators; railroad manufacturing and maintenance; customers in agriculture; infrastructure construction companies; and other customers that require instrumentation, service tools and/or equipment for their product and business needs.

The industrial sector for Snap-on focuses on providing value-added products and services to an increasingly expanding global base of customers in critical industries. Through its experienced and dispersed sales organization, industrial “solutioneers” develop unique and highly valued productivity solutions for customers worldwide that leverage Snap-on’s product, service and development capabilities.

The industrial sector is characterized by a highly competitive, cost-conscious environment, and a trend toward customers making many of their tool and equipment purchases through one integrated supplier. Industrial customers increasingly require specialized solutions that provide repeatability and reliability in performing tasks of consequence that are specific to the particular end market in which they operate. Snap-on believes it is a meaningful participant in the industrial tools and equipment market sector.

 

 

 

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Distribution Channels

Snap-on serves customers primarily through the following channels of distribution: (i) the mobile van channel; (ii) company direct sales; (iii) distributors; and (iv) e-commerce. The following discussion summarizes Snap-on’s general approach for each channel, and is not intended to be all-inclusive.

Mobile Van Channel

In the United States, a significant portion of sales to the vehicle service and repair sector is conducted through Snap-on’s mobile franchise van channel. Snap-on’s franchisees primarily serve vehicle repair technicians and vehicle service shop owners, generally providing weekly contact at the customer’s place of business. Franchisees’ sales are concentrated in hand and power tools, tool storage products, shop equipment, and diagnostic and repair information products, which can easily be transported in a van or trailer and demonstrated during a brief sales call. Franchisees purchase Snap-on’s products at a discount from suggested list prices and resell them at prices established by the franchisee. U.S. franchisees are provided a list of calls that serves as the basis of the franchisee’s sales route. Snap-on’s franchisees also have the opportunity to add a limited number of additional franchises.

Snap-on charges nominal initial and ongoing monthly franchise fees. Franchise fee revenue, including nominal, non-refundable initial and ongoing monthly fees (primarily for sales and business training, and marketing and product promotion programs), is recognized as the fees are earned. Franchise fee revenue totaled $13.9 million, $12.7 million and $12.1 million in fiscal 2016, 2015 and 2014, respectively.

Snap-on also has a company-owned route program that is designed to: (i) provide another pool of potential field organization personnel; (ii) service customers in select new and/or open routes not currently serviced by franchisees; and (iii) allow Snap-on to pilot new sales and promotional ideas prior to introducing them to franchisees. As of 2016 year end, company-owned routes comprised less than 3% of the total route population; Snap-on may elect to increase or reduce the number of company-owned routes in the future.

In addition to its mobile van channel in the United States, Snap-on has replicated its U.S. franchise distribution model in certain other countries including the United Kingdom, Canada, Japan, Australia, Germany, Netherlands, South Africa, New Zealand, Belgium and Ireland. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians as well as repair shop owners and managers. As of 2016 year end, Snap-on’s worldwide route count was approximately 4,900, including approximately 3,500 routes in the United States.

Through SOC, financing is available to U.S. franchisees, including financing for van leases, working capital loans and loans to help enable new franchisees to fund the purchase of the franchise. In many international markets, Snap-on offers a variety of financing options to its franchisees and/or customer networks through its international finance subsidiaries. The decision to finance through Snap-on or another financing source is solely at the customer’s election.

Snap-on supports its franchisees with a field organization of regional offices, franchise performance teams, customer care centers and distribution centers. Snap-on also provides sales and business training, and marketing and product promotion programs, as well as customer and franchisee financing programs through SOC and the company’s international finance subsidiaries, all of which are designed to strengthen franchisee sales. National Franchise Advisory Councils in the United States, the United Kingdom, Canada and Australia, composed primarily of franchisees that are elected by franchisees, assist Snap-on in identifying and implementing enhancements to the franchise program.

Company Direct Sales

A significant proportion of shop equipment sales in North America under the John Bean, Hofmann, Blackhawk, Car-O-Liner, Challenger and Pro-Cut brands, diagnostic products under the Snap-on brand and information products under the Mitchell1 brand are made by direct and independent sales forces that have responsibility for national and other accounts. As the vehicle service and repair sector consolidates (with more business conducted by national chains and franchised service centers), Snap-on believes these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of diagnostic and equipment products and services. Snap-on also sells these products and services directly to OEMs and their franchised dealers.

 

 

 

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Snap-on brand tools and equipment are marketed to industrial and governmental customers worldwide through both industrial sales associates and independent distributors. Selling activities focus on industrial customers whose main purchase criteria are quality and integrated solutions. As of 2016 year end, Snap-on had industrial sales associates and independent distributors primarily in the United States and in various European, Latin American, Middle Eastern, Asian and African countries, with the United States representing the majority of Snap-on’s total industrial sales.

Snap-on also sells software, services and solutions to the automotive, commercial, heavy duty, agriculture, power equipment and power sports segments. Products and services are marketed to targeted groups, including OEMs and their dealerships, fleets and individual repair shops. To effectively reach OEMs, which frequently have a multi-national presence, Snap-on has deployed focused business teams globally.

Distributors

Sales of certain tools and equipment are made through independent distributors who purchase the items from Snap-on and resell them to end users. Hand tools sold under the BAHCO, Fish and Hook, Irimo, Lindström, CDI, ATI, Sioux, Sturtevant Richmont and Williams brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Wheel service and other vehicle service equipment are sold through distributors primarily under brands including Hofmann, John Bean, Car-O-Liner, Challenger, Pro-Cut, Cartec, Blackhawk and Ecotechnics. Diagnostic and equipment products are marketed through distributors in South America and Asia, and through both a direct sales force and distributors in Europe under the Snap-on, Sun and Blue-Point brands.

E-commerce

Snap-on offers current and prospective customers online access to research and purchase products through its public website at www.snapon.com. The site features an online catalog of Snap-on hand tools, power tools, tool storage units and diagnostic equipment available to customers in the United States, the United Kingdom, Canada and Australia. E-commerce and certain other system enhancement initiatives are designed to improve productivity and further leverage the one-on-one relationships and service Snap-on has with its current and prospective customers. Sales through the company’s e-commerce distribution channel were not significant in any of the last three years.

Competition

Snap-on competes on the basis of its product quality and performance, product line breadth and depth, service, brand awareness and imagery, technological innovation and availability of financing (through SOC or its international finance subsidiaries). While Snap-on does not believe that any single company competes with it across all of its product lines and distribution channels, various companies compete in one or more product categories and/or distribution channels.

Snap-on believes it is a leading manufacturer and distributor of professional tools, tool storage, diagnostic and equipment products, and repair software and solutions, offering a broad line of these products to both vehicle service and industrial marketplaces. Various competitors target and sell to professional technicians in the vehicle service and repair sector through the mobile tool distribution channel. Snap-on also competes with companies that sell tools and equipment to vehicle service and repair technicians online and through retail stores, vehicle parts supply outlets and tool supply warehouses/distributorships. Within the power tools category and the industrial sector, Snap-on has various other competitors, including companies with offerings that overlap with other areas discussed herein. Major competitors selling diagnostics, shop equipment and information to vehicle dealerships and independent repair shops include OEMs and their proprietary electronic parts catalogs and diagnostics and information systems, and other companies that offer products serving this sector.

Raw Materials and Purchased Product

Snap-on’s supply of raw materials and purchased components are generally and readily available from numerous suppliers. Snap-on believes it has secured an ample supply of both bar and coil steel for the near future to ensure stable supply to meet material demands. The company does not currently anticipate experiencing any significant impact in 2017 from steel pricing or availability issues.

 

 

 

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Patents, Trademarks and Other Intellectual Property

Snap-on vigorously pursues and relies on patent protection to protect its intellectual property and position in its markets. As of 2016 year end, Snap-on and its subsidiaries held approximately 700 active and pending patents in the United States and approximately 1,600 active and pending patents outside of the United States. Sales relating to any single patent did not represent a material portion of Snap-on’s revenues in any of the last three years.

Examples of products that have features or designs that benefit from patent protection include wheel alignment systems, wheel balancers, tire changers, vehicle lifts, tool storage, tool control, collision measurement, test lanes, brake lathes, sealed ratchets, electronic torque instruments, ratcheting screwdrivers, emissions-sensing devices and diagnostic equipment.

Much of the technology used in the manufacture of vehicle service tools and equipment is in the public domain. Snap-on relies primarily on trade secret protection to protect proprietary processes used in manufacturing. Methods and processes are patented when appropriate. Copyright protection is also utilized when appropriate.

Trademarks used by Snap-on are of continuing importance to Snap-on in the marketplace. Trademarks have been registered in the United States and many other countries, and additional applications for trademark registrations are pending. Snap-on vigorously polices proper use of its trademarks. Snap-on’s right to manufacture and sell certain products is dependent upon licenses from others; however, these products under license do not represent a material portion of Snap-on’s net sales.

Domain names have become a valuable corporate asset for companies around the world, including Snap-on. Domain names often contain a trademark or service mark or even a corporate name and are often considered intellectual property. The recognition and value of the Snap-on name, trademark and domain name are core strengths of the company.

Snap-on strategically licenses the Snap-on brand to carefully selected manufacturing and distribution companies for items such as apparel, work boots, lighting and a variety of other goods, in order to further build brand awareness and market presence for the company’s strongest brand.

Environmental

Snap-on is subject to various environmental laws, ordinances, regulations, and other requirements of government authorities in the United States and other nations. At Snap-on, these environmental liabilities are managed through the Snap-on Environmental, Health and Safety Management System (“EH & SMS”), which is applied worldwide. The system is based upon continual improvement and is certified to ISO 14001:2004 and OHSAS 18001:2007, verified through Det Norske Veritas (DNV) Certification, Inc.

Snap-on believes that it complies with applicable environmental control requirements in its operations. Expenditures on environmental matters through EH & SMS have not had, and Snap-on does not for the foreseeable future expect them to have, a material effect upon Snap-on’s capital expenditures, earnings or competitive position.

Employees

Snap-on employed approximately 12,100 people at the end of January 2017; Snap-on employed approximately 11,500 people at the end of January 2016. The year-over-year increase in employees primarily reflects the Car-O-Liner and Sturtevant Richmont acquisitions.

Approximately 2,800 employees, or 23% of Snap-on’s worldwide workforce, are represented by unions and/or covered under collective bargaining agreements. The number of covered union employees whose contracts expire over the next five years approximates 2,100 employees in 2017, 500 employees in 2018, and 200 employees in 2019; there are no contracts currently scheduled to expire in 2020 or 2021. In recent years, Snap-on has not experienced any significant work slowdowns, stoppages or other labor disruptions.

There can be no assurance that these and other future contracts with Snap-on’s unions will be renegotiated upon terms acceptable to Snap-on.

 

 

 

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Working Capital

Most of Snap-on’s businesses are not seasonal and their inventory needs are relatively constant. Snap-on did not have a significant backlog of orders at 2016 year end. In recent years, Snap-on has been using its working capital to fund, in part, the continued growth of the company’s financial services portfolio and the acquisitions discussed above.

Snap-on’s liquidity and capital resources and use of working capital are discussed herein in “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

As of 2016 year end, neither Snap-on nor any of its segments depend on any single customer, small group of customers or government for any material part of its revenues.

Item 1A: Risk Factors

In evaluating the company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K, including the Consolidated Financial Statements and the related notes. Each of these risk factors could adversely affect the company’s business, operating results, cash flows and/or financial condition, as well as adversely affect the value of an investment in the company’s common stock.

Economic conditions and world events could affect our operating results.

We, our franchisees and our customers, may be adversely affected by changing economic conditions, including conditions that may particularly impact specific regions. These conditions may result in reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending. We, our franchisees and our customers, and the economy as a whole, also may be affected by future world or local events outside our control, such as acts of terrorism, developments in the war on terrorism, conflicts in international situations and natural disasters, as well as government-related developments or issues. These factors may affect our results of operations by reducing our sales, margins and/or net earnings as a result of a slowdown in customer orders or order cancellations, impact the availability of raw materials and/or the supply chain, and could potentially lead to future impairment of our intangible assets. In addition, political and social turmoil related to international conflicts and terrorist acts may put pressure on economic conditions abroad. Unstable political, social and economic conditions may make it difficult for our franchisees, customers, suppliers and us to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition, results of operations and cash flows could be negatively affected.

In June 2016, the United Kingdom voted in a referendum to exit the European Union (“Brexit”), which resulted in significant currency exchange rate fluctuations and volatility beginning late in the second quarter of fiscal 2016. Subject to parliamentary approval, the British government is expected to commence negotiations to determine the terms of Brexit. Given the lack of comparable precedent, the implications of Brexit, or how such implications might affect Snap-on, are unclear at this time. Brexit could, among other impacts, disrupt trade and the movement of goods, services and people between the United Kingdom and the European Union or other countries as well as create legal and global economic uncertainty. These and other potential implications could adversely affect our business and results of operations.

Raw material and energy price fluctuations and shortages (including steel and various fuel sources) could adversely affect the ability to obtain needed manufacturing materials and could adversely affect our results of operations.

The principal raw material used in the manufacture of our products is steel, which we purchase in competitive, price-sensitive markets. To meet Snap-on’s high quality standards, our steel needs range from specialized alloys, which are available only from a limited group of approved suppliers, to commodity types of alloys. These raw materials have historically exhibited price and demand cyclicality. Some of these materials have been, and in the future may be, in short supply, particularly in the event of mill shutdowns or production cut backs. As some steel alloys require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. Additionally, unexpected price increases for raw materials could result in higher prices to our customers or an erosion of the margins on our products.

 

 

 

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We believe our ability to sell our products is also dependent on the number of vehicles on the road, the number of miles driven and the general aging of vehicles. These factors affect the frequency, type and amount of service and repair performed on vehicles by technicians, and therefore affect the demand for the number of technicians, the prosperity of technicians and, consequently, the demand technicians have for our tools, other products and services, and the value technicians place on those products and services. The use of other methods of transportation, including more frequent use of public transportation, could result in a decrease in the use of privately operated vehicles. A decrease in the use of privately operated vehicles may lead to fewer repairs and less demand for our products.

We use various energy sources to transport, produce and distribute products, and some of our products have components that are petroleum based. Petroleum and energy prices have periodically increased significantly over short periods of time; future volatility and changes may be caused by market fluctuations, supply and demand, currency fluctuations, production and transportation disruptions, world events and changes in governmental programs. Energy price increases raise both our operating costs and the costs of our materials, and we may not be able to increase our prices enough to offset these costs. Higher prices also may reduce the level of future customer orders and our profitability.

The performance of Snap-on’s mobile tool distribution business depends on the success of its franchisees.

Approximately 44% of our consolidated net revenues in 2016 were generated by the Snap-on Tools Group, which consists of Snap-on’s business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. Snap-on’s success is dependent on its relationships with franchisees, individually and collectively, as they are the primary sales and service link between the company and vehicle service and repair technicians, who are an important class of end users for Snap-on’s products and services. If our franchisees are not successful, or if we do not maintain an effective relationship with our franchisees, the delivery of products, the collection of receivables and/or our relationship with end users could be adversely affected and thereby negatively impact our business, financial condition, results of operations and cash flows.

In addition, if we are unable to maintain effective relationships with franchisees, Snap-on or the franchisees may choose to terminate the relationship, which may result in (i) open routes, in which end-user customers are not provided reliable service; (ii) litigation resulting from termination; (iii) reduced collections or increased write-offs of franchisee receivables owed to Snap-on; and/or (iv) reduced collections or increased write-offs of finance and contract receivables.

Exposure to credit risks of customers and resellers may make it difficult to collect receivables and could adversely affect operating results and financial condition.

The size of our financial services portfolio has increased significantly in recent years. A decline in industry and/or economic conditions could have the potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ ability to repay their credit obligations were to deteriorate and result in the write-down or write-off of such receivables, it would negatively affect our operating results for the period in which they occur and, if large, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our inability to provide acceptable financing alternatives to end-user customers and franchisees could adversely impact our operating results.

An integral component of our business and profitability is our ability to offer competitive financing alternatives to end-user customers and franchisees. The lack of our ability to offer such alternatives or obtain capital resources or other financing to support our receivables on terms that we believe are attractive, whether resulting from the state of the financial markets, our own operating performance, or other factors, would negatively affect our operating results and financial condition. Adverse fluctuations in interest rates and/or our ability to provide competitive financing programs could also have an adverse impact on our revenue and profitability.

New, stricter and/or changed legislation and regulations may affect our business, reputation, results of operations and financial condition.

Increased legislative and regulatory activity and compliance burdens, including those associated with sales to our government, military and defense contractor customers, as well as a more stringent manner in which they are applied, could significantly impact our business and the economy as a whole.

 

 

 

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Financial services businesses of all kinds are subject to increasing regulation and enforcement. In addition to potentially increasing the costs of doing business due to compliance obligations, new laws and regulations, or changes to existing laws and regulations, as well as the enforcement thereof, may affect the relationships between creditors and debtors, inhibit the rights of creditors to collect amounts owed to them, expand liability for certain actions or inactions, or limit the types of financial products or services offered, any or all of which could have a material adverse effect on our financial condition, results of operations and cash flows. Failure to comply with any of these laws or regulations could also result in civil, criminal, monetary and/or non-monetary penalties, damage to our reputation, and/or the incurrence of remediation costs.

These developments, and other potential future legislation and regulations, as well as the increasingly strict regulatory environment, including the growing international regulation of privacy rights, may also adversely affect the customers to which, and the markets into which, we sell our products, and increase our costs and otherwise negatively affect our business, reputation, results of operations and financial condition, including in ways that cannot yet be foreseen.

Failure to achieve expected investment returns on pension plan assets, as well as changes in interest rates or plan demographics, could adversely impact our results of operations, financial condition and cash flows.

Snap-on sponsors various defined benefit pension plans (the “pension plans”). The assets of the pension plans are diversified in an attempt to mitigate the risk of a large loss. Required funding for the company’s domestic defined benefit pension plans is determined in accordance with guidelines set forth in the federal Employee Retirement Income Security Act (“ERISA”); foreign defined benefit pension plans are funded in accordance with local statutes or practice. Additional contributions to enhance the funded status of the pension plans can be made at the company’s discretion. However, there can be no assurance that the value of the pension plan assets, or the investment returns on those plan assets, will be sufficient to meet the future benefit obligations of such plans. In addition, during periods of adverse investment market conditions and declining interest rates, the company may be required to make additional cash contributions to the pension plans that could reduce our financial flexibility. Changes in plan demographics, including an increase in the number of retirements or changes in life expectancy assumptions, may also increase the costs and funding requirements of the obligations related to the company’s pension plans.

Our pension plan obligations are affected by changes in market interest rates. Significant fluctuations in market interest rates have added, and may further add, volatility to our pension plan obligations. In periods of declining market interest rates, our pension plan obligations generally increase; in periods of increasing market interest rates, our pension plan obligations generally decrease. While our plan assets are broadly diversified, there are inherent market risks associated with investments; if adverse market conditions occur, our plan assets could incur significant or material losses. Since we may need to make additional contributions to address changes in obligations and/or a loss in plan assets, the combination of declining market interest rates, past or future plan asset investment losses, and/or changes in plan demographics could adversely impact our results of operations, financial condition and cash flows.

The company’s pension plan expense is comprised of the following factors: (i) service cost; (ii) interest on projected benefit obligations; (iii) expected return on plan assets; (iv) the amortization of prior service costs and credits; (v) effects of actuarial gains and losses; and (vi) settlement/curtailment costs, when applicable. The accounting for pensions involves the estimation of a number of factors that are highly uncertain. Certain factors, such as the interest on projected benefit obligations and the expected return on plan assets, are impacted by changes in market interest rates and the value of plan assets. A significant decrease in market interest rates and a decrease in the fair value of plan assets would increase net pension expense and may adversely affect the company’s future results of operations. See Note 11 to the Consolidated Financial Statements for further information on the company’s pension plans.

Adverse developments in the credit and financial markets could negatively impact the availability of credit that we and our customers need to operate our businesses.

We depend upon the availability of credit to operate our business, including the financing of receivables from end-user customers that are originated by our financial services businesses. Our end-user customers, franchisees and suppliers also require access to credit for their businesses. At times in recent years, world financial markets have been unstable and subject to uncertainty. Adverse developments in the credit and financial markets, or unfavorable changes in Snap-on’s credit rating, could negatively impact the availability of future financing and the terms on which it might be available to Snap-on, its end-user customers, franchisees and suppliers. Inability to access credit or capital markets, or a deterioration in the terms on which financing might be available, could have an adverse impact on our business, financial condition, results of operations and cash flows.

 

 

 

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Increasing our financial leverage could affect our operations and profitability.

The maximum available credit under our multi-currency revolving credit facility is $700 million. The company’s leverage ratio may affect both our availability of additional capital resources as well as our operations in several ways, including:

 

   

The terms on which credit may be available to us could be less attractive, both in the economic terms of the credit and the covenants stipulated by the credit terms;

   

The possible lack of availability of additional credit or access to the commercial paper market;

   

The potential for higher levels of interest expense to service or maintain our outstanding debt;

   

The possibility of additional borrowings in the future to repay our indebtedness when it comes due; and

   

The possible diversion of capital resources from other uses.

While we believe we will have the ability to service our debt and obtain additional resources in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets, and other factors that may be beyond our control. Therefore, we cannot give assurances that credit will be available on terms that we consider attractive, or at all, if and when necessary or beneficial to us.

Data security and information technology infrastructure and security are critical to supporting business objectives; failure of our systems to operate effectively could adversely affect our business and reputation.

We depend heavily on information technology infrastructure to achieve our business objectives and to protect sensitive information, and continually invest in improving such systems. Problems that impair or compromise this infrastructure, including due to natural disasters, power outages, major network failures, security breaches or malicious attacks, or during system upgrades and/or new system implementations, could impede our ability to record or process orders, manufacture and ship in a timely manner, account for and collect receivables, protect sensitive data of the company, our customers, our suppliers and business partners, or otherwise carry on business in the normal course. Any such events, if significant, could cause us to lose customers and/or revenue and could require us to incur significant expense to remediate, including as a result of legal or regulatory claims or proceedings, and could also damage our reputation. While we have taken steps to maintain adequate data security and address these risks and uncertainties by implementing security technologies, internal controls, network and data center resiliency, and redundancy and recovery processes, as well as by securing insurance, these measures may be inadequate.

In association with initiatives to better integrate business units, rationalize operating footprint and improve responsiveness to franchisees and customers, Snap-on is continually replacing and enhancing its global Enterprise Resource Planning (ERP) management information systems. As we integrate, implement and deploy new information technology processes and enhance our common information infrastructure across our global operations, we could experience disruptions in our business that could have an adverse effect on our business, financial condition, results of operations and cash flows.

Failure to maintain effective distribution of products and services could adversely impact revenue, gross margin and profitability.

We use a variety of distribution methods to sell our products and services. Successfully managing the interaction of our distribution efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks, costs and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.

Risks associated with the disruption of manufacturing operations could adversely affect profitability or competitive position.

We manufacture a significant portion of the products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, facility consolidation or closure actions, lack of raw material or component availability, destruction of or damage to any facility (as a result of natural disasters, use and storage of hazardous materials or other events), or other reasons, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

 

 

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The inability to continue to introduce new products that respond to customer needs and achieve market acceptance could result in lower revenues and reduced profitability.

Sales from new products represent a significant portion of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete effectively unless we continue to enhance existing products or introduce new products to the marketplace in a timely manner. Product improvements and new product introductions require significant financial and other resources, including significant planning, design, development, and testing at the technological, product and manufacturing process levels. Our competitors’ new products may beat our products to market, be more effective with more features, be less expensive than our products, and/or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs and research and development.

The global tool, equipment, and diagnostics and repair information industries are competitive.

We face strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressures from competitors and customers are increasing. In general, as a manufacturer and marketer of premium products and services, the expectations of Snap-on’s customers and its franchisees are high and continue to increase. Any inability to maintain customer satisfaction could diminish Snap-on’s premium image and reputation and could result in a lessening of our ability to command premium pricing. We expect that the level of competition will remain high in the future, which could limit our ability to maintain or increase market share or profitability.

Product liability claims and litigation could affect our business, reputation, financial condition, results of operations and cash flows.

The products that we design and/or manufacture, and/or the services we provide, can lead to product liability claims or other legal claims being filed against us. To the extent that plaintiffs are successful in showing that a defect in a product’s design, manufacture or warnings led to personal injury or property damage, or that our provision of services resulted in similar injury or damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages up to the insurance retention amount. In addition to claims concerning individual products, as a manufacturer, we can be subject to costs, potential negative publicity and lawsuits related to product recalls, which could adversely impact our results of operations and damage our reputation.

Legal disputes could adversely affect our business, reputation, financial condition, results of operations and cash flows.

From time to time we are subject to legal disputes that are being litigated and/or settled in the ordinary course of business. Disputes or future lawsuits could result in the diversion of management’s time and attention away from business operations. Additionally, negative developments with respect to legal disputes and the costs incurred in defending ourselves could have an adverse impact on the company and its reputation. Adverse outcomes or settlements could also require us to pay damages, potentially in excess of amounts reserved, or incur liability for other remedies that could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flows.

Failure to adequately protect intellectual property could adversely affect our business.

Intellectual property rights are an important and integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.

 

 

 

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Foreign operations are subject to political, economic, currency exchange and other risks that could adversely affect our business, financial condition, results of operations and cash flows.

Approximately 30% of our revenues in 2016 were generated outside of the United States. Future growth rates and success of our business depends in large part on continued growth in our non-U.S. operations, including growth in emerging markets and critical industries. Numerous risks and uncertainties affect our non-U.S. operations. These risks and uncertainties include political, economic and social instability, such as acts of war, civil disturbance or acts of terrorism, local labor conditions, changes in government policies and regulations, including imposition or increases in withholding and other taxes on remittances and other payments by international subsidiaries, as well as the exposure to liabilities under anti-corruption laws in various countries, such as the U.S. Foreign Corrupt Practices Act, currency volatility, transportation delays or interruptions, sovereign debt uncertainties and difficulties in enforcement of contract and intellectual property rights, as well as natural disasters. Should the economic environment in our non-U.S. markets deteriorate from current levels, our results of operations and financial position could be materially impacted, including as a result of the effects of potential impairment write-downs of goodwill and/or other intangible assets related to these businesses.

The reporting currency for Snap-on’s consolidated financial statements is the U.S. dollar. Certain of the company’s assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar. In preparing Snap-on’s Consolidated Financial Statements, those assets, liabilities, expenses and revenues are translated into U.S. dollars at applicable exchange rates. Increases or decreases in exchange rates between the U.S. dollar and other currencies affect the U.S. dollar value of those items, as reflected in the Consolidated Financial Statements. Substantial fluctuations in the value of the U.S. dollar could have a significant impact on the company’s financial condition and results of operations.

We are also affected by changes in inflation rates and interest rates. Additionally, cash generated in non-U.S. jurisdictions may be difficult to repatriate to the United States in a tax-efficient manner. Our foreign operations are also subject to other risks and challenges, such as the need to staff and manage diverse workforces, respond to the needs of multiple national and international marketplaces, and differing business climates and cultures in various countries.

We may not successfully integrate businesses we acquire, which could have an adverse impact on our business, financial condition, results of operations and cash flows.

The pursuit of growth through acquisitions, including participation in joint ventures, involves significant risks that could have a material adverse effect on our business, financial condition, results of operations and cash flows. These risks include:

 

   

Loss of the acquired businesses’ customers;

   

Inability to integrate successfully the acquired businesses’ operations;

   

Inability to coordinate management and integrate and retain employees of the acquired businesses;

   

Unforeseen or contingent liabilities of the acquired businesses;

   

Large write-offs or write-downs, or the impairment of goodwill or other intangible assets;

   

Difficulties in implementing and maintaining consistent standards, controls, procedures, policies and information systems;

   

Failure to realize anticipated synergies, economies of scale or other anticipated benefits, or to maintain operating margins;

   

Strain on our personnel, systems and resources, and diversion of attention from other priorities;

   

Incurrence of additional debt and related interest expense; and

   

The dilutive effect in the event of the issuance of additional equity securities.

The recognition of impairment charges on goodwill or other intangible assets would adversely impact our future financial condition and results of operations.

We have a substantial amount of goodwill and purchased intangible assets, almost all of which are booked in the Commercial & Industrial Group and in the Repair Systems & Information Group. We are required to perform impairment tests on our goodwill and other intangibles annually or at any time when events occur that could impact the value of our business segments. Our determination of whether impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes in circumstances, such as significant and long-term adverse changes in business climate, adverse actions by regulators, unanticipated competition, the loss of key customers, and/or changes in technology or markets, could require a provision for impairment in a future period that could substantially impact our reported earnings and reduce our consolidated net worth and shareholders’ equity. Should the economic environment in these markets deteriorate, our results of operations and financial position could be materially impacted, including as a result of the effects of potential impairment write-downs of goodwill and/or other intangible assets related to these businesses.

 

 

 

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Our operations expose us to the risk of environmental liabilities, costs, litigation and violations that could adversely affect our financial condition, results of operations and reputation.

Certain of our operations are subject to environmental laws and regulations in the jurisdictions in which they operate, which impose limitations on the discharge of pollutants into the ground, air and water and establish standards for the generation, treatment, use, storage and disposal of hazardous wastes. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we may incur costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices. Legislation has been proposed, and governmental regulatory action has been both proposed and taken, that may significantly impact environmental compliance in the United States; these actions could increase our costs of production by raising the cost of energy as well as by further restricting emissions or other processes that we currently use in our operations. We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws will not exceed our estimates.

The inability to successfully defend claims from taxing authorities could adversely affect our financial condition, results of operations and cash flows.

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions, as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our financial condition, results of operations and cash flows.

Failure to attract and retain qualified personnel could lead to a loss of revenue and/or profitability.

Snap-on’s success depends, in part, on the efforts and abilities of its senior management team and other key employees. Their skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract and retain members of our senior management team and other key employees could have a negative effect on our operating results. In addition, transitions of important responsibilities to new individuals inherently include the possibility of disruptions to our business and operations, which could negatively affect our business, financial condition, results of operations and cash flows.

The steps taken to restructure operations, rationalize operating footprint, lower operating expenses and achieve greater efficiencies in the supply chain could disrupt business.

We have taken steps in the past, and expect to take additional steps in the future, intended to improve customer service and drive further efficiencies and reduce costs, some of which could be disruptive to our business. These actions, collectively across our operating groups, are focused on the following:

 

   

Continuing to invest in initiatives focused on building a strong sales and operating presence in emerging growth markets;

   

Continuing to enhance service and value to our franchisees and customers;

   

Continuing to implement efficiency and productivity initiatives throughout the company to drive further efficiencies and reduce costs;

   

Continuing on the company’s existing path to improve and transform global manufacturing and the supply chain into a market-demand-based replenishment system with lower costs;

   

Continuing to invest in developing and marketing new, innovative, higher-value-added products and advanced technologies;

   

Extending our products and services into additional and/or adjacent markets or to new customers; and

   

Continuing to provide financing for, and grow our portfolio of, receivables within our financial services businesses.

 

 

 

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A failure to succeed in the implementation of any or all of these actions could result in an inability to achieve our financial goals and could be disruptive to the business.

In addition, any future reductions to headcount and other cost reduction measures may result in the loss of technical expertise and could adversely affect our research and development efforts as well as our ability to meet product development schedules. Efforts to reduce components of expense could result in the recording of charges for inventory and technology-related write-offs, workforce reduction costs or other charges relating to the consolidation or closure of facilities. If we were to incur a substantial charge to further these efforts, our earnings per share would be adversely affected in such period. If we are unable to effectively manage our cost reduction and restructuring efforts, our business, financial condition, results of operations and cash flows could be negatively affected.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

Snap-on maintains leased and owned manufacturing (including software products), warehouse, distribution, research and development and office facilities throughout the world. Snap-on believes that its facilities currently in use are suitable and have adequate capacity to meet its present and foreseeable future demand. Snap-on’s facilities in the United States occupy approximately 3.3 million square feet, of which 75% is owned, including its corporate and general office facility located in Kenosha, Wisconsin. Snap-on’s facilities outside the United States occupy approximately 4.5 million square feet, of which approximately 71% is owned. Certain Snap-on facilities are leased through operating and capital lease agreements. See Note 15 to the Consolidated Financial Statements for information on the company’s operating and capital leases. Snap-on management continually monitors the company’s capacity needs and makes adjustments as dictated by market and other conditions.

 

 

 

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The following table provides information about our corporate headquarters and financial services operations, and each of Snap-on’s principal active manufacturing locations and distribution centers (exceeding 50,000 square feet) as of 2016 year end:

 

Location

  

Principal Property Use

  

Owned/Leased

  

Segment*

U.S. Locations:

        

Elkmont, Alabama

  

Manufacturing

  

Owned

  

SOT

Conway, Arkansas

  

Manufacturing

  

Owned

  

RS&I

City of Industry, California

  

Manufacturing

  

Leased

  

C&I

Poway, California

  

Manufacturing and distribution

  

Leased

  

RS&I

San Jose, California

  

Manufacturing and distribution

  

Leased

  

RS&I

Columbus, Georgia

  

Distribution

  

Owned

  

C&I

Crystal Lake, Illinois

  

Distribution

  

Owned and leased

  

SOT

Libertyville, Illinois

  

Financial services

  

Leased

  

FS

Algona, Iowa

  

Manufacturing and distribution

  

Owned

  

SOT

Louisville, Kentucky

  

Manufacturing and distribution

  

Leased

  

RS&I

Olive Branch, Mississippi

  

Distribution

  

Owned

  

SOT

Carson City, Nevada

  

Distribution

  

Owned and leased

  

SOT

Murphy, North Carolina

  

Manufacturing and distribution

  

Owned

  

C&I

Richfield, Ohio

  

Manufacturing and distribution

  

Owned

  

RS&I

Robesonia, Pennsylvania

  

Distribution

  

Owned

  

SOT

Elizabethton, Tennessee

  

Manufacturing

  

Owned

  

SOT

Kenosha, Wisconsin

  

Distribution and corporate

  

Owned

  

SOT, C&I, RS&I

Milwaukee, Wisconsin

  

Manufacturing

  

Owned

  

SOT

Non-U.S. Locations:

        

Santo Tome, Argentina

  

Manufacturing

  

Owned

  

C&I

New South Wales, Australia

  

Distribution and financial services

  

Leased

  

SOT, FS

Minsk, Belarus

  

Manufacturing

  

Owned

  

C&I

Santa Bárbara d’Oeste, Brazil

  

Manufacturing and distribution

  

Owned

  

RS&I

Calgary, Canada

  

Distribution

  

Leased

  

SOT

Mississauga, Canada

  

Distribution

  

Leased

  

SOT, RS&I

Beijing, China

  

Manufacturing

  

Leased

  

C&I

Kunshan, China

  

Manufacturing

  

Owned

  

C&I

Xiaoshan, China

  

Manufacturing

  

Owned

  

C&I

Bramley, England

  

Manufacturing

  

Owned

  

C&I

Kettering, England

  

Distribution and financial services

  

Owned and leased

  

SOT, C&I, FS

Sopron, Hungary

  

Manufacturing

  

Owned

  

RS&I

Correggio, Italy

  

Manufacturing

  

Owned

  

RS&I

Tokyo, Japan

  

Distribution

  

Leased

  

C&I

Helmond, Netherlands

  

Distribution

  

Owned

  

C&I

Vila do Conde, Portugal

  

Manufacturing

  

Owned

  

C&I

Irun, Spain

  

Manufacturing

  

Owned

  

C&I

Placencia, Spain

  

Manufacturing

  

Owned

  

C&I

Vitoria, Spain

  

Manufacturing and distribution

  

Owned

  

C&I

Bollnäs, Sweden

  

Manufacturing

  

Owned

  

C&I

Edsbyn, Sweden

  

Manufacturing

  

Owned

  

C&I

Kungsör, Sweden

  

Manufacturing

  

Owned

  

RS&I

Lidköping, Sweden

  

Manufacturing

  

Owned

  

C&I

Örebro, Sweden

  

Manufacturing

  

Owned

  

RS&I

 

*

Segment abbreviations:

C&I – Commercial & Industrial Group

SOT – Snap-on Tools Group

RS&I – Repair Systems & Information Group

FS – Financial Services

 

 

 

20    SNAP-ON INCORPORATED   


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Item 3: Legal Proceedings

Snap-on is involved in various legal matters that are being litigated and/or settled in the ordinary course of business. Although it is not possible to predict the outcome of these legal matters, management believes that the results of these legal matters will not have a material impact on Snap-on’s consolidated financial position, results of operations or cash flows.

Item 4: Mine Safety Disclosures

Not applicable.

PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Snap-on had 57,949,857 shares of common stock outstanding as of 2016 year end. Snap-on’s stock is listed on the New York Stock Exchange under the ticker symbol “SNA.” At February 3, 2017, there were 5,040 registered holders of Snap-on common stock.

The high and low closing prices of Snap-on’s common stock during each fiscal quarter for the last two years were as follows:

 

     Common Stock High/Low Prices  
     2016      2015  

    Quarter    

   High      Low      High      Low  

First

       $   168.53               $   135.41               $   148.29               $   131.45       

Second

     164.39             148.03             162.19             146.16       

Third

     162.70             146.76             169.99             148.90       

Fourth

     176.20             145.97             174.09             154.57       

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Quarterly dividends in 2016 were $0.71 per share in the fourth quarter and $0.61 per share in each of the first three quarters ($2.54 per share for the year). Quarterly dividends in 2015 were $0.61 per share in the fourth quarter and $0.53 per share in each of the first three quarters ($2.20 per share for the year). Cash dividends paid in 2016 and 2015 totaled $147.5 million and $127.9 million, respectively. Snap-on’s Board of Directors (the “Board”) monitors and evaluates the company’s dividend practice quarterly and the Board may elect to increase, decrease or not pay a dividend on Snap-on common stock based upon the company’s financial condition, results of operations, cash requirements and future prospects of Snap-on and other factors deemed relevant by the Board.

See Note 13 to the Consolidated Financial Statements for information on securities authorized for issuance under equity compensation plans.

 

 

 

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Issuer Purchases of Equity Securities

The following chart discloses information regarding the shares of Snap-on’s common stock repurchased by the company during the fourth quarter of fiscal 2016, all of which were purchased pursuant to the Board’s authorizations that the company has publicly announced. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, stock options and other corporate purposes, as well as to repurchase shares when the company believes market conditions are favorable. The repurchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions.

 

            Period             

   Shares
purchased
     Average price
per share
     Shares purchased as
part of publicly
announced plans or
programs
   Approximate
value of shares
that may yet be
purchased  under
publicly
announced plans
or programs*
 

10/02/16 to 10/29/16

     65,000               $   156.36           65,000        $   201.2 million   

10/30/16 to 11/26/16

     61,000               $ 165.64           61,000        $   217.0 million   

11/27/16 to 12/31/16

     140,000               $ 169.27           140,000         $   207.2 million   
  

 

 

       

 

  

Total/Average

         266,000               $ 165.28               266,000           N/A   
  

 

 

       

 

  

 

N/A: Not applicable

 

*

Subject to further adjustment pursuant to the 1996 Authorization described below, as of December 31, 2016, the approximate value of shares that may yet be purchased pursuant to the three outstanding Board authorizations discussed below is $207.2 million.

 

   

In 1996, the Board authorized the company to repurchase shares of the company’s common stock from time to time in the open market or in privately negotiated transactions (“the 1996 Authorization”). The 1996 Authorization allows the repurchase of up to the number of shares issued or delivered from treasury from time to time under the various plans the company has in place that call for the issuance of the company’s common stock. Because the number of shares that are purchased pursuant to the 1996 Authorization will change from time to time as (i) the company issues shares under its various plans; and (ii) shares are repurchased pursuant to this authorization, the number of shares authorized to be repurchased will vary from time to time. The 1996 Authorization will expire when terminated by the Board. When calculating the approximate value of shares that the company may yet purchase under the 1996 Authorization, the company assumed a price of $153.21, $170.58 and $171.27 per share of common stock as of the end of the fiscal 2016 months ended October 29, 2016, November 26, 2016, and December 31, 2016, respectively.

 

   

In 1998, the Board authorized the repurchase of an aggregate of $100 million of the company’s common stock (“the 1998 Authorization”). The 1998 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board.

 

   

In 1999, the Board authorized the repurchase of an aggregate of $50 million of the company’s common stock (“the 1999 Authorization”). The 1999 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board.

 

 

 

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Other Purchases or Sales of Equity Securities

The following chart discloses information regarding transactions in shares of Snap-on’s common stock by Citibank, N.A. (“Citibank”) during the fourth quarter of 2016 pursuant to a prepaid equity forward agreement (the “Agreement”) with Citibank that is intended to reduce the impact of market risk associated with the stock-based portion of the company’s deferred compensation plans. The company’s stock-based deferred compensation liabilities, which are impacted by changes in the company’s stock price, increase as the company’s stock price rises and decrease as the company’s stock price declines. Pursuant to the Agreement, Citibank may purchase or sell shares of the company’s common stock (for Citibank’s account) in the market or in privately negotiated transactions. The Agreement has no stated expiration date and does not provide for Snap-on to purchase or repurchase its shares.

Citibank Sales of Snap-on Stock

 

            Period             

   Shares sold      Average price
per share
 

10/02/16 to 10/29/16

     –                –          

10/30/16 to 11/26/16

         3,800               $   165.52       

11/27/16 to 12/31/16

     3,000               $ 168.99       
  

 

 

    

Total/Average

     6,800               $ 167.05       
  

 

 

    

 

 

 

   2016 ANNUAL REPORT    23


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Five-year Stock Performance Graph

The graph below illustrates the cumulative total shareholder return on Snap-on common stock since December 31, 2011, assuming that dividends were reinvested. The graph compares Snap-on’s performance to that of a Peer Group, Standard & Poor’s 500 Industrials Index (“S&P 500 Industrials”) and Standard & Poor’s 500 Stock Index (“S&P 500”). As a result of acquisitions and other transactions impacting companies that comprise the Peer Group listed below, Snap-on believes that the S&P 500 Industrials Index, of which Snap-on is a member, is a more relevant source of comparative performance. In accordance with SEC rules, Snap-on is presenting information for both the Peer Group and the S&P 500 Industrials Index this year; going forward, only the S&P 500 Industrials Index will be presented along with Snap-on and the S&P 500.

Snap-on Incorporated Total Shareholder Return (1)

 

LOGO

 

Fiscal Year Ended (2)                

   Snap-on
Incorporated
     Peer Group (3)      S&P 500
Industrials
     S&P 500  

December 31, 2011

       $     100.00               $   100.00               $   100.00               $   100.00       

December 31, 2012

     159.41             117.59             115.35             116.00       

December 31, 2013

     224.87             160.15             162.27             153.58       

December 31, 2014

     285.06             167.54             178.21             174.60       

December 31, 2015

     362.38             158.07             173.70             177.01       

December 31, 2016

     367.95             179.83             206.46             198.18       

 

(1)

Assumes $100 was invested on December 31, 2011, and that dividends were reinvested quarterly.

(2)

The company’s fiscal year ends on the Saturday that is on or nearest to December 31 of each year; for ease of calculation, the fiscal year end is assumed to be December 31.

(3)

The Peer Group consists of: Stanley Black & Decker, Inc., Danaher Corporation, Emerson Electric Co., Genuine Parts Company, Newell Brands Inc., Pentair plc, SPX Corporation and W.W. Grainger, Inc.

 

 

 

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Item 6: Selected Financial Data

The selected financial data presented below has been derived from, and should be read in conjunction with, the respective historical consolidated financial statements of the company, including the notes thereto, and “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In the following table, “Total assets” was adjusted on a retrospective basis for all years presented to reflect the company’s 2016 adoption of Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). See Note 1 to the Consolidated Financial Statements for information on the company’s adoption of ASU No. 2015-17.

 

Five-year Data

         
(Amounts in millions, except per share data)   2016     2015     2014     2013     2012  

Results of Operations

         

Net sales

      $   3,430.4              $   3,352.8              $   3,277.7              $   3,056.5              $   2,937.9       

Gross profit

    1,709.6            1,648.3            1,584.3            1,472.9            1,390.0       

Operating expenses

    1,054.1            1,053.7            1,048.7            1,012.4            980.3       

Operating earnings before financial services

    655.5            594.6            535.6            460.5            409.7       

Financial services revenue

    281.4            240.3            214.9            181.0            161.3       

Financial services expenses

    82.7            70.1            65.8            55.3            54.6       

Operating earnings from financial services

    198.7            170.2            149.1            125.7            106.7       

Operating earnings

    854.2            764.8            684.7            586.2            516.4       

Interest expense

    52.2            51.9            52.9            56.1            55.8       

Earnings before income taxes and equity earnings

    801.4            710.5            630.9            526.2            460.2       

Income tax expense

    244.3            221.2            199.5            166.7            148.2       

Earnings before equity earnings

    557.1            489.3            431.4            359.5            312.0       

Equity earnings, net of tax

    2.5            1.3            0.7            0.2            2.6       

Net earnings

    559.6            490.6            432.1            359.7            314.6       

Net earnings attributable to noncontrolling interests

    (13.2)           (11.9)           (10.2)           (9.4)           (8.5)      

Net earnings attributable to Snap-on

    546.4            478.7            421.9            350.3            306.1       

Financial Position

         

Cash and cash equivalents

      $ 77.6              $ 92.8              $ 132.9              $ 217.6              $ 214.5       

Trade and other accounts receivable – net

    598.8            562.5            550.8            531.6            497.9       

Finance receivables – net (current)

    472.5            447.3            402.4            374.6            323.1       

Contract receivables – net (current)

    88.1            82.1            74.5            68.4            62.7       

Inventories – net

    530.5            497.8            475.5            434.4            404.2       

Property and equipment – net

    425.2            413.5            404.5            392.5            375.2       

Long-term finance receivables – net

    934.5            772.7            650.5            560.6            494.6       

Long-term contract receivables – net

    286.7            266.6            242.0            217.1            194.4       

Total assets

    4,723.2            4,331.1            4,162.0            3,994.5            3,789.7       

Notes payable and current maturities of long-term debt

    301.4            18.4            56.6            113.1            5.2       

Accounts payable

    170.9            148.3            145.0            155.6            142.5       

Long-term debt

    708.8            861.7            862.7            858.9            970.4       

Total debt

    1,010.2            880.1            919.3            972.0            975.6       

Total shareholders’ equity attributable to Snap-on

    2,617.2            2,412.7            2,207.8            2,113.2            1,802.1       

Common Share Summary

         

Weighted-average shares outstanding – diluted

    59.4            59.1            59.1            59.1            58.9       

Net earnings per share attributable to Snap-on:

         

Basic

      $ 9.40              $ 8.24              $ 7.26              $ 6.02              $ 5.26       

Diluted

    9.20            8.10            7.14            5.93            5.20       

Cash dividends paid per share

    2.54            2.20            1.85            1.58            1.40       

Shareholders’ equity per basic share

    45.05            41.53            38.00            36.31            30.96       

 

 

 

   2016 ANNUAL REPORT    25


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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management Overview    

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “organic sales” refer to sales from continuing operations calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding acquisition-related sales and the impact of foreign currency translation. Management evaluates the company’s sales performance based on organic sales growth, which primarily reflects growth from the company’s existing businesses as a result of increased output, customer base and geographic expansion, new product development and/or pricing, and excludes sales contributions from acquired operations the company did not own as of the comparable prior-year reporting period. The company’s organic sales disclosures also exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying growth trends in our businesses and facilitating comparisons of our sales performance with prior periods.

We believe our growth in 2016 demonstrates Snap-on’s continued progress in providing repeatability and reliability to a wide range of professional customers performing critical tasks in workplaces of consequence, as continued strengthening in the automotive repair sector combined with headwinds in certain industrial end markets that were most pronounced in the first half of the year. Leveraging capabilities already demonstrated in the automotive repair arena, our “coherent growth” strategy focuses on developing and expanding our professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high.

We believe our 2016 operating results also provide continued evidence that Snap-on’s value proposition of making work easier for serious professionals in workplaces of consequence is an ongoing strength as we move forward along our runways for coherent growth:

 

   

Enhancing the franchise network, where we continued to focus on helping our franchisees extend their reach through innovative selling processes and productivity initiatives that break the traditional time and space barriers inherent in a mobile van;

   

Expanding in the vehicle repair garage, where we continued to make significant progress in connecting with customers and translating the resulting insights into innovation that solves specific challenges in the repair facility. For example, the October 31, 2016 acquisition of Car-O-Liner Holding AB (“Car-O-Liner”) broadened our established capabilities in serving vehicle repair facilities and further expanded our presence with repair shop owners and managers;

   

Further extending in critical industries, where we continued to grow our lines of products customized for specific industries, despite near-term challenges in certain industrial end markets; and

   

Building in emerging markets, where we continued to build manufacturing capacity, focused product lines and distribution capability.

We also believe our year-over-year improvement in operating margin further validates the potential of our Snap-on Value Creation Processes – our suite of strategic principles and processes we employ every day designed to create value and employed in the areas of safety, quality, customer connection, innovation and rapid continuous improvement.

Our global financial services operations continue to serve a significant strategic role in offering financing options to our franchisees, to their customers, and to customers in other parts of our business. We expect that our global financial services business, which includes both Snap-on Credit LLC (“SOC”) in the United States and our other international finance subsidiaries, will continue to be a meaningful contributor to our operating earnings going forward.

Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

 

 

 

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Recent Acquisitions

On November 16, 2016, Snap-on acquired Ryeson Corporation (d/b/a Sturtevant Richmont) for a preliminary cash purchase price of $12.9 million (or $12.5 million, net of cash acquired). The preliminary purchase price is subject to change based upon the finalization of a working capital adjustment that is expected to be completed in the first quarter of 2017. Sturtevant Richmont, based in Carol Stream, Illinois, designs, manufactures and distributes mechanical and electronic torque wrenches as well as wireless torque error proofing systems for a variety of industrial applications. The acquisition of Sturtevant Richmont enhanced and expanded Snap-on’s capabilities in providing solutions that address torque requirements, which are increasingly essential to critical mechanical performance. For segment reporting purposes, the results of operations and assets of Sturtevant Richmont have been included in the Commercial & Industrial Group since the acquisition date.

On October 31, 2016, Snap-on acquired Car-O-Liner for a preliminary cash purchase price of $151.8 million (or $147.9 million, net of cash acquired). The preliminary purchase price is subject to change based upon the finalization of a working capital adjustment that is expected to be completed in the first quarter of 2017. Car-O-Liner, based in Gothenburg, Sweden, designs and manufactures collision repair equipment, and information and truck alignment systems. The acquisition of Car-O-Liner complemented and increased Snap-on’s existing equipment and repair and service information product offerings, broadened its established capabilities in serving vehicle repair facilities and further expanded the company’s presence with repair shop owners and managers. For segment reporting purposes, substantially all of Car-O-Liner’s results of operations and assets have been included in the Repair Systems & Information Group since the acquisition date, with the remaining portions included in the Commercial & Industrial Group.

On July 27, 2015, Snap-on acquired the assets of Ecotechnics S.p.A. (“Ecotechnics”) for a cash purchase price of $11.8 million. Ecotechnics designs and manufactures vehicle air conditioning service equipment for original equipment manufacturer (“OEM”) dealerships and the automotive aftermarket worldwide. The acquisition of the Ecotechnics product line complemented and increased Snap-on’s existing equipment product offering for OEM dealerships and independent automotive repair shops, broadened its established capabilities in serving vehicle repair facilities, and expanded the company’s presence with repair shop owners and managers.

On May 28, 2014, Snap-on acquired substantially all of the assets of Pro-Cut International Inc. (“Pro-Cut”) for a cash purchase price of $41.3 million. Pro-Cut designs, manufactures and distributes on-car brake lathes, related equipment and accessories used in brake servicing by automotive repair facilities. The acquisition of the Pro-Cut product line complemented and increased Snap-on’s existing undercar equipment product offering, broadened its established capabilities in serving vehicle repair facilities and expanded the company’s presence with repair shop owners and managers.

For segment reporting purposes, the results of operations and assets of Ecotechnics and Pro-Cut have been included in the Repair Systems & Information Group since the respective acquisition dates.

Pro forma financial information has not been presented for any of these acquisitions as the net effects, individually and collectively, were neither significant nor material to Snap-on’s results of operations or financial position.

Consolidated net sales of $3,430.4 million in 2016 increased $77.6 million, or 2.3%, from 2015 levels, reflecting a $96.2 million, or 2.9%, increase in organic sales (a non-GAAP financial measure that excludes acquisition-related sales and the impact of foreign currency translation) and $32.9 million of acquisition-related sales, partially offset by $51.5 million of unfavorable foreign currency translation.

Operating earnings before financial services of $655.5 million in 2016 were up $60.9 million, or 10.2%, from 2015 levels, reflecting contributions from higher sales and improved operating margins, including contributions from “Rapid Continuous Improvement” or “RCI” initiatives, partially offset by $21.5 million of unfavorable foreign currency effects.

Snap-on’s RCI initiatives employ a structured set of tools and processes across multiple businesses and geographies intended to eliminate waste and improve operations. Savings from Snap-on’s RCI initiatives reflect benefits from a wide variety of ongoing efficiency, productivity and process improvements, including savings generated from product design cost reductions, improved manufacturing line set-up and change-over practices, lower-cost sourcing initiatives and facility consolidations. Unless individually significant, it is not practicable to disclose each RCI activity that generated savings and/or segregate RCI savings embedded in sales volume increases.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Operating earnings of $854.2 million in 2016 increased $89.4 million, or 11.7%, from $764.8 million last year. In 2016, net earnings attributable to Snap-on Incorporated were $546.4 million or $9.20 per diluted share. Net earnings attributable to Snap-on Incorporated in 2015 were $478.7 million or $8.10 per diluted share.

The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. Segment net sales of $1,148.3 million in 2016 decreased $15.3 million, or 1.3%, from 2015 levels, reflecting $20.6 million of unfavorable foreign currency translation partially offset by $4.2 million of acquisition-related sales and a $1.1 million, or 0.1%, organic sales gain. The organic sales increase primarily includes higher sales in the segment’s European-based hand tools business and in its Asia/Pacific and power tools operations, largely offset by lower sales to customers in critical industries, primarily in the international aerospace and natural resources market segments. Operating earnings of $168.0 million in 2016 decreased $1.4 million, or 0.8%, from 2015 levels, including $1.1 million of unfavorable foreign currency effects.

The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2017:

 

   

Continuing to invest in emerging market growth initiatives;

   

Expanding our business with existing customers and reaching new customers in critical industries and other market segments;

   

Broadening our product offering and engineered solutions designed particularly for critical industry segments;

   

Increasing our customer-connection-driven understanding of work across multiple industries;

   

Investing in innovation that, guided by that understanding of work, delivers an ongoing stream of productivity-enhancing solutions; and

   

Continuing to reduce structural and operating costs through RCI initiatives.

The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. Segment net sales of $1,633.9 million in 2016 increased $65.2 million, or 4.2%, from 2015 levels, reflecting an $86.4 million, or 5.6%, organic sales gain partially offset by $21.2 million of unfavorable foreign currency translation. The organic sales increase includes higher sales in both the company’s U.S. and international franchise operations. Operating earnings of $281.1 million in 2016 increased $25.1 million, or 9.8%, from 2015 levels, primarily as a result of higher sales and savings from RCI initiatives, partially offset by $15.3 million of unfavorable foreign currency effects.

The Snap-on Tools Group made continued progress in 2016 on its fundamental, strategic initiatives to strengthen the franchise network and enhance franchisee profitability. In 2017, the Snap-on Tools Group intends to further build on the progress made in 2016, with specific initiatives focused on the following:

 

   

Continuing to improve franchisee satisfaction, productivity, profitability and commercial health;

   

Developing new programs and products to expand market coverage, reaching new technicians and increasing penetration with existing customers;

   

Continuing to invest in new product innovation and development; and

   

Increasing operational flexibility in back office support functions, manufacturing and the supply chain through RCI initiatives and investment.

By focusing on these areas, we believe that Snap-on, as well as its franchisees, will have the opportunity to continue to serve customers more effectively, more profitably and with improved satisfaction.

The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealership service and repair shops (“OEM dealerships”), through direct and distributor channels. Segment net sales of $1,179.9 million in 2016 increased $66.7 million, or 6.0%, from 2015 levels, reflecting a $52.1 million, or 4.7%, organic sales gain and $28.7 million of acquisition-related sales, partially offset by $14.1 million of unfavorable foreign currency translation. The organic sales increase primarily reflects higher sales to independent repair shop owners and managers, as well as increased sales to OEM dealerships, including higher sales of diagnostic and repair information products, and increased sales of undercar equipment. Operating earnings of $297.8 million in 2016 increased $24.4 million, or 8.9%, from 2015 levels, primarily due to higher sales, including acquisition-related sales, and savings from RCI initiatives, partially offset by $5.1 million of unfavorable foreign currency effects.

 

 

 

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The Repair Systems & Information Group intends to focus on the following strategic priorities in 2017:

 

   

Expanding the product offering with new products and services, thereby providing more to sell to repair shop owners and managers;

   

Continuing software and hardware upgrades to further improve functionality, performance and efficiency;

   

Leveraging integration of software solutions;

   

Continuing productivity advancements through RCI initiatives and leveraging of resources; and

   

Increasing penetration in geographic markets, including emerging markets.

Financial Services revenue was $281.4 million in 2016 and $240.3 million in 2015; originations of $1,075.7 million in 2016 increased $82.0 million, or 8.3%, from 2015 levels. In recent years, Snap-on has steadily grown its financial services portfolio by providing financing for new finance and contract receivables originated by our global financial services operations. In 2016, operating earnings from financial services of $198.7 million increased $28.5 million, or 16.7%, from $170.2 million last year, including $1.8 million of unfavorable foreign currency effects.    

Financial Services intends to focus on the following strategic priorities in 2017:

 

   

Delivering financial products and services that attract and sustain profitable franchisees and support Snap-on’s strategies for expanding market coverage and penetration;

   

Improving productivity levels and ensuring high quality in all financial products and processes through the use of RCI initiatives; and

   

Maintaining healthy portfolio performance levels.

Cash Flows

Net cash provided by operating activities of $576.1 million in 2016 increased $68.9 million from $507.2 million in 2015 primarily due to $69.0 million of higher net earnings. Net cash provided by operating activities was $403.1 million in 2014.

Net cash used by investing activities of $473.4 million in 2016 included additions to finance receivables of $915.0 million, partially offset by collections of $671.7 million. It also included, on a preliminary basis, a total of $160.4 million (net of $4.3 million of cash acquired) for the acquisitions of Car-O-Liner and Sturtevant Richmont. Net cash used by investing activities of $306.4 million in 2015 included additions to finance receivables of $844.2 million, partially offset by collections of $624.8 million, as well as $11.8 million for the acquisition of Ecotechnics. Net cash used by investing activities of $273.2 million in 2014 included additions to finance receivables of $746.2 million, partially offset by collections of $591.4 million, as well as $41.3 million for the acquisition of Pro-Cut. Capital expenditures in 2016, 2015 and 2014 totaled $74.3 million, $80.4 million and $80.6 million, respectively. Capital expenditures in all three years included investments to support the company’s execution of its strategic growth initiatives and Value Creation Processes around safety, quality, customer connection, innovation and RCI.

Net cash used by financing activities of $116.0 million in 2016 included $147.5 million for dividend payments to shareholders and $120.4 million for the repurchase of 758,000 shares of Snap-on’s common stock, partially offset by $134.2 million of proceeds from a net increase in notes payable and other short-term borrowings and $41.8 million of proceeds from stock purchase and option plan exercises. Net cash used by financing activities of $236.7 million in 2015 included $127.9 million for dividend payments to shareholders, $110.4 million for the repurchase of 723,000 shares of Snap-on’s common stock and $34.0 million from a net decrease in notes payable and other short-term borrowings, partially offset by $41.6 million of proceeds from stock purchase and option plan exercises. Net cash used by financing activities of $212.1 million in 2014 included the repayment of $100 million of unsecured notes at maturity. Net cash used by financing activities in 2014 also included $107.6 million for dividend payments to shareholders and $79.3 million for the repurchase of 680,000 shares of Snap-on’s common stock, partially offset by $45.0 million of proceeds from a net increase in notes payable and other short-term borrowings and $33.0 million of proceeds from stock purchase and option plan exercises.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Fiscal Year

Snap-on’s fiscal year ends on the Saturday that is on or nearest to December 31. Unless otherwise indicated, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “fiscal 2016” or “2016” refer to the fiscal year ended December 31, 2016; references to “fiscal 2015” or “2015” refer to the fiscal year ended January 2, 2016; and references to “fiscal 2014” or “2014” refer to the fiscal year ended January 3, 2015. References in this document to 2016, 2015 and 2014 year end refer to December 31, 2016, January 2, 2016, and January 3, 2015, respectively.

Snap-on’s 2016 and 2015 fiscal years each contained 52 weeks of operating results. Snap-on’s 2014 fiscal year contained 53 weeks of operating results; the impact of the additional week of operations was not material to Snap-on’s full year 2014 net sales or net earnings.

Results of Operations

2016 vs. 2015

Results of operations for 2016 and 2015 are as follows:

 

(Amounts in millions)   2016     2015     Change  

Net sales

      $ 3,430.4                100.0%              $ 3,352.8                100.0%              $ 77.6            2.3%       

Cost of goods sold

      (1,720.8)           -50.2%              (1,704.5)           -50.8%              (16.3)           -1.0%       
 

 

 

     

 

 

     

 

 

   

Gross profit

    1,709.6            49.8%            1,648.3            49.2%            61.3            3.7%       

Operating expenses

    (1,054.1)           -30.7%            (1,053.7)           -31.5%            (0.4)           –              
 

 

 

     

 

 

     

 

 

   

Operating earnings before financial services

    655.5            19.1%            594.6            17.7%            60.9            10.2%       

Financial services revenue

    281.4            100.0%            240.3            100.0%            41.1            17.1%       

Financial services expenses

    (82.7)           -29.4%            (70.1)           -29.2%            (12.6)           -18.0%       
 

 

 

     

 

 

     

 

 

   

Operating earnings from financial services

    198.7            70.6%            170.2            70.8%            28.5            16.7%       
 

 

 

     

 

 

     

 

 

   

Operating earnings

    854.2            23.0%            764.8            21.3%            89.4            11.7%       

Interest expense

    (52.2)           -1.4%            (51.9)           -1.4%            (0.3)           -0.6%       

Other income (expense) – net

    (0.6)           –                   (2.4)           -0.1%            1.8            NM          
 

 

 

     

 

 

     

 

 

   

Earnings before income taxes and equity earnings

    801.4            21.6%            710.5            19.8%            90.9            12.8%       

Income tax expense

    (244.3)           -6.6%            (221.2)           -6.2%            (23.1)           -10.4%       
 

 

 

     

 

 

     

 

 

   

Earnings before equity earnings

    557.1            15.0%            489.3            13.6%            67.8            13.9%       

Equity earnings, net of tax

    2.5            0.1%            1.3            –                   1.2            NM          
 

 

 

     

 

 

     

 

 

   

Net earnings

    559.6            15.1%            490.6            13.6%            69.0            14.1%       

Net earnings attributable to noncontrolling interests

    (13.2)           -0.4%            (11.9)           -0.3%            (1.3)               -10.9%       
 

 

 

     

 

 

     

 

 

   

Net earnings attributable to Snap-on Inc.

      $ 546.4            14.7%              $ 478.7            13.3%              $ 67.7            14.1%       
 

 

 

     

 

 

     

 

 

   

 

NM: Not meaningful

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

Net sales of $3,430.4 million in 2016 increased $77.6 million, or 2.3%, from 2015 levels, reflecting a $96.2 million, or 2.9%, organic sales gain and $32.9 million of acquisition-related sales, partially offset by $51.5 million of unfavorable foreign currency translation.

 

 

 

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Gross profit of $1,709.6 million in 2016 compared to $1,648.3 million last year. Gross margin (gross profit as a percentage of net sales) of 49.8% in 2016 improved 60 basis points (100 basis points (“bps”) equals 1.0 percent) from 49.2% last year as benefits from higher sales and savings from RCI initiatives were partially offset by 20 bps of unfavorable foreign currency effects. Restructuring costs included in gross profit were $0.8 million and zero in 2016 and 2015, respectively.

Operating expenses of $1,054.1 million in 2016 compared to $1,053.7 million last year. The operating expense margin (operating expenses as a percentage of net sales) of 30.7% in 2016 improved 80 bps from 31.5% last year primarily due to sales volume leverage and savings from RCI initiatives, 30 bps of lower stock-based (mark-to-market) compensation and other expenses, including lower costs associated with the company’s employee and franchisee stock purchase plans, and 20 bps of lower pension expense. Restructuring costs included in operating expenses were $0.1 million and zero in 2016 and 2015, respectively.

Operating earnings before financial services of $655.5 million in 2016, including $21.5 million of unfavorable foreign currency effects, increased $60.9 million, or 10.2%, as compared to $594.6 million last year. As a percentage of net sales, operating earnings before financial services of 19.1% in 2016 improved 140 bps from 17.7% last year.

Financial services revenue of $281.4 million in 2016 compared to revenue of $240.3 million last year. Financial services operating earnings of $198.7 million in 2016, including $1.8 million of unfavorable foreign currency effects, increased $28.5 million, or 16.7%, as compared to $170.2 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.

Operating earnings of $854.2 million in 2016, including $23.3 million of unfavorable foreign currency effects, increased $89.4 million, or 11.7%, from $764.8 million last year. As a percentage of revenues (net sales plus financial services revenue), operating earnings of 23.0% in 2016 improved 170 bps from 21.3% last year.

Interest expense of $52.2 million in 2016 increased $0.3 million from $51.9 million last year. See Note 9 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $0.6 million and $2.4 million in 2016 and 2015, respectively. Other income (expense) – net reflects net losses and gains associated with hedging and currency exchange rate transactions, and interest income. See Note 16 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 31.0% in 2016 and 31.7% in 2015. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $546.4 million, or $9.20 per diluted share, in 2016 increased $67.7 million, or $1.10 per diluted share, from 2015 levels. Net earnings attributable to Snap-on in 2015 were $478.7 million or $8.10 per diluted share.

Exit and Disposal Activities

In 2016, the company’s Repair Systems & Information Group recorded $0.9 million of severance costs for exit and disposal activities, all of which qualified for accrual treatment; no costs for exit and disposal activities were recorded in 2015. The exit and disposal accrual of $2.8 million as of 2016 year end is expected to be fully utilized in 2017. Snap-on anticipates funding the remaining cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the company’s existing credit facilities. The estimated costs for the exit and disposal activities were based on management’s best business judgment under prevailing circumstances.

Segment Results

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

Commercial & Industrial Group

 

(Amounts in millions)    2016      2015      Change  

External net sales

       $ 863.0             75.2%               $ 895.5             77.0%               $     (32.5)               -3.6%       

Intersegment net sales

     285.3             24.8%             268.1             23.0%             17.2              6.4%       
  

 

 

       

 

 

       

 

 

    

Segment net sales

       1,148.3             100.0%               1,163.6             100.0%             (15.3)             -1.3%       

Cost of goods sold

     (698.3)            -60.8%             (717.1)            -61.6%             18.8              2.6%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     450.0             39.2%             446.5             38.4%             3.5              0.8%       

Operating expenses

     (282.0)            -24.6%             (277.1)            -23.8%             (4.9)             -1.8%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 168.0             14.6%               $ 169.4             14.6%               $ (1.4)             -0.8%       
  

 

 

       

 

 

       

 

 

    

Segment net sales of $1,148.3 million in 2016 decreased $15.3 million, or 1.3%, from 2015 levels, reflecting $20.6 million of unfavorable foreign currency translation partially offset by $4.2 million of acquisition-related sales and a $1.1 million, or 0.1%, organic sales gain. The organic sales increase primarily includes a mid single-digit gain in the segment’s European-based hand tools business and low single-digit increases in both the segment’s Asia/Pacific and power tools operations. These organic sales gains were largely offset by a mid single-digit decline in sales to customers in critical industries, primarily in the international aerospace and natural resources market segments.

Segment gross profit of $450.0 million in 2016 compared to $446.5 million last year. Gross margin of 39.2% in 2016 improved 80 bps from 38.4% last year primarily due to savings from RCI and other cost reduction initiatives, and 20 bps of favorable foreign currency effects.

Segment operating expenses of $282.0 million in 2016 compared to $277.1 million last year. The operating expense margin of 24.6% in 2016 increased 80 bps from 23.8% last year primarily due to higher costs, including costs associated with continued expansion initiatives in Asia, a 20 bps benefit realized in 2015 from a gain on the sale of a former manufacturing facility, and 10 bps of unfavorable foreign currency effects.

As a result of these factors, segment operating earnings of $168.0 million in 2016, including $1.1 million of unfavorable foreign currency effects, decreased $1.4 million from 2015 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group was 14.6% in both years.

Snap-on Tools Group

 

(Amounts in millions)    2016      2015      Change  

Segment net sales

       $   1,633.9                 100.0%               $   1,568.7                 100.0%               $ 65.2             4.2%       

Cost of goods sold

     (929.8)            -56.9%             (885.7)            -56.5%               (44.1)            -5.0%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     704.1             43.1%             683.0             43.5%             21.1             3.1%       

Operating expenses

     (423.0)            -25.9%             (427.0)            -27.2%             4.0             0.9%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 281.1             17.2%               $ 256.0             16.3%               $ 25.1             9.8%       
  

 

 

       

 

 

       

 

 

    

 

 

 

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Segment net sales of $1,633.9 million in 2016 increased $65.2 million, or 4.2%, from 2015 levels, reflecting an $86.4 million, or 5.6%, organic sales gain partially offset by $21.2 million of unfavorable foreign currency translation. The organic sales increase includes mid single-digit gains in both the company’s U.S. and international franchise operations.

Segment gross profit of $704.1 million in 2016 compared to $683.0 million last year. Gross margin of 43.1% in 2016 declined 40 bps from 43.5% last year as 70 bps of unfavorable foreign currency effects were partially offset by benefits from higher sales.

Segment operating expenses of $423.0 million in 2016 compared to $427.0 million last year. The operating expense margin of 25.9% in 2016 improved 130 bps from 27.2% last year primarily due to sales volume leverage and savings from RCI and other cost reduction initiatives, as well as 20 bps of lower stock-based costs associated with the company’s franchisee stock purchase plan.

As a result of these factors, segment operating earnings of $281.1 million in 2016, including $15.3 million of unfavorable foreign currency effects, increased $25.1 million from 2015 levels. Operating margin for the Snap-on Tools Group of 17.2% in 2016 improved 90 bps from 16.3% last year.

Repair Systems & Information Group

 

(Amounts in millions)    2016      2015      Change  

External net sales

       $     933.5                 79.1%               $     888.6                 79.8%               $     44.9             5.1%       

Intersegment net sales

     246.4             20.9%             224.6             20.2%             21.8             9.7%       
  

 

 

       

 

 

       

 

 

    

Segment net sales

       1,179.9             100.0%               1,113.2             100.0%             66.7             6.0%       

Cost of goods sold

     (624.4)            -52.9%             (594.4)            -53.4%               (30.0)            -5.0%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     555.5             47.1%             518.8             46.6%             36.7             7.1%       

Operating expenses

     (257.7)            -21.9%             (245.4)            -22.0%             (12.3)            -5.0%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 297.8             25.2%               $ 273.4             24.6%               $ 24.4             8.9%       
  

 

 

       

 

 

       

 

 

    

Segment net sales of $1,179.9 million in 2016 increased $66.7 million, or 6.0%, from 2015 levels, reflecting a $52.1 million, or 4.7%, organic sales gain and $28.7 million of acquisition-related sales, partially offset by $14.1 million of unfavorable foreign currency translation. The organic sales increase includes a high single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, and low single-digit increases in both sales of undercar equipment and sales to OEM dealerships.

Segment gross profit of $555.5 million in 2016 compared to $518.8 million last year. Gross margin of 47.1% in 2016 improved 50 bps from 46.6% last year, as benefits from higher sales and savings from RCI initiatives were partially offset by 10 bps of unfavorable currency effects. Restructuring costs included in gross profit were $0.8 million and zero in 2016 and 2015, respectively.

Segment operating expenses of $257.7 million in 2016 compared to $245.4 million last year. The operating expense margin of 21.9% in 2016 improved 10 bps from 22.0% last year primarily due to sales volume leverage and savings from RCI initiatives, partially offset by 20 bps of impact from the Car-O-Liner acquisition. Restructuring costs included in operating expenses were $0.1 million and zero in 2016 and 2015, respectively.

As a result of these factors, segment operating earnings of $297.8 million in 2016, including $5.1 million of unfavorable foreign currency effects, increased $24.4 million from 2015 levels. Operating margin for the Repair Systems & Information Group of 25.2% in 2016 improved 60 bps from 24.6% last year.

Financial Services

 

(Amounts in millions)    2016      2015      Change  

Financial services revenue

       $   281.4                 100.0%               $   240.3                 100.0%               $ 41.1             17.1%       

Financial services expenses

     (82.7)            -29.4%             (70.1)            -29.2%               (12.6)            -18.0%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 198.7             70.6%               $ 170.2             70.8%               $ 28.5             16.7%       
  

 

 

       

 

 

       

 

 

    

 

 

 

   2016 ANNUAL REPORT    33


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Financial services revenue of $281.4 million in 2016 increased $41.1 million, or 17.1%, from $240.3 million last year primarily reflecting $38.1 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $2.7 million of increased revenue from higher average yields on finance receivables. In 2016 and 2015, the respective average yield on finance receivables was 18.0% and 17.8%, and the respective average yield on contract receivables was 9.4% and 9.5%. Originations of $1,075.7 million in 2016 increased $82.0 million, or 8.3%, from 2015 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $82.7 million in 2016 increased from $70.1 million last year primarily due to changes in both the size of the portfolio and in the provisions for credit losses. As a percentage of the average financial services portfolio, financial services expenses were 4.9% and 4.8% in 2016 and 2015, respectively.

Financial services operating earnings of $198.7 million in 2016, including $1.8 million of unfavorable foreign currency effects, increased $28.5 million, or 16.7%, from 2015 levels.

See Note 1 and Note 3 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s general corporate expenses in 2016 of $91.4 million decreased $12.8 million from $104.2 million last year. The year-over-year decrease in general corporate expenses primarily reflects $6.9 million of lower pension expense, $6.4 million of lower stock-based (mark-to-market) compensation expense and $2.3 million of lower stock-based costs associated with the company’s employee stock purchase plan, partially offset by $2.8 million of higher acquisition-related and other costs.

Fourth Quarter

Results of operations for the fourth quarters of 2016 and 2015 are as follows:

 

     Fourth Quarter      Change  
(Amounts in millions)    2016      2015     

Net sales

       $ 889.8                 100.0%               $ 851.7                 100.0%               $ 38.1                 4.5%       

Cost of goods sold

       (445.9)            -50.1%               (439.4)            -51.6%             (6.5)            -1.5%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     443.9             49.9%             412.3             48.4%             31.6             7.7%       

Operating expenses

     (267.8)            -30.1%             (250.0)            -29.3%               (17.8)            -7.1%       
  

 

 

       

 

 

       

 

 

    

Operating earnings before financial services

     176.1             19.8%             162.3             19.1%             13.8             8.5%       

Financial services revenue

     74.2             100.0%             63.1             100.0%             11.1             17.6%       

Financial services expenses

     (22.6)            -30.5%             (18.1)            -28.7%             (4.5)            -24.9%       
  

 

 

       

 

 

       

 

 

    

Operating earnings from financial services

     51.6             69.5%             45.0             71.3%             6.6             14.7%       
  

 

 

       

 

 

       

 

 

    

Operating earnings

     227.7             23.6%             207.3             22.7%             20.4             9.8%       

Interest expense

     (13.1)            -1.4%             (13.0)            -1.4%             (0.1)            -0.8%       

Other income (expense) – net

     (0.3)            –                    (0.5)            -0.1%             0.2             NM          
  

 

 

       

 

 

       

 

 

    

Earnings before income taxes and equity earnings

     214.3             22.2%             193.8             21.2%             20.5             10.6%       

Income tax expense

     (64.9)            -6.7%             (59.3)            -6.5%             (5.6)            -9.4%       
  

 

 

       

 

 

       

 

 

    

Earnings before equity earnings

     149.4             15.5%             134.5             14.7%             14.9             11.1%       

Equity earnings, net of tax

     0.3             –                    –                 –                    0.3             NM          
  

 

 

       

 

 

       

 

 

    

Net earnings

     149.7             15.5%             134.5             14.7%             15.2             11.3%       

Net earnings attributable to noncontrolling interests

     (3.4)            -0.3%             (3.1)            -0.3%             (0.3)            -9.7%       
  

 

 

       

 

 

       

 

 

    

Net earnings attributable to Snap-on Inc.

       $ 146.3             15.2%               $ 131.4             14.4%               $ 14.9             11.3%       
  

 

 

       

 

 

       

 

 

    

 

NM: Not meaningful

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

 

 

 

34    SNAP-ON INCORPORATED   


Table of Contents

 

 

 

Net sales of $889.8 million in the fourth quarter of 2016 increased $38.1 million, or 4.5%, from 2015 levels, reflecting a $30.0 million, or 3.6%, organic sales gain and $23.3 million of acquisition-related sales, partially offset by $15.2 million of unfavorable foreign currency translation.

Gross profit of $443.9 million in the fourth quarter of 2016 compared to $412.3 million last year. Gross margin of 49.9% in the quarter improved 150 bps from 48.4% last year primarily due to benefits from higher sales and savings from RCI initiatives.

Operating expenses of $267.8 million in the fourth quarter of 2016 compared to $250.0 million last year. The operating expense margin of 30.1% in the quarter increased 80 bps from 29.3% last year primarily due to 60 bps of higher acquisition-related and other expenses, including operating expenses for Car-O-Liner and Sturtevant Richmont, and a 30 bps benefit realized in the fourth quarter of 2015 primarily from a gain on the sale of a former manufacturing facility, partially offset by 20 bps of lower pension expense.

Operating earnings before financial services of $176.1 million in the fourth quarter of 2016, including $3.7 million of unfavorable foreign currency effects, increased $13.8 million, or 8.5%, as compared to $162.3 million last year. As a percentage of net sales, operating earnings before financial services of 19.8% in the quarter improved 70 bps from 19.1% last year.

Financial services revenue of $74.2 million in the fourth quarter of 2016 compared to revenue of $63.1 million last year. Financial services operating earnings of $51.6 million in the fourth quarter of 2016, including $0.6 million of unfavorable foreign currency effects, increased $6.6 million, or 14.7%, as compared to $45.0 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.

Operating earnings of $227.7 million in the fourth quarter of 2016, including $4.3 million of unfavorable foreign currency effects, increased $20.4 million, or 9.8%, from $207.3 million last year. As a percentage of revenues, operating earnings of 23.6% in the quarter improved 90 bps from 22.7% last year.

Interest expense of $13.1 million in the fourth quarter of 2016 increased $0.1 million from $13.0 million last year. See Note 9 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $0.3 million and $0.5 million in the respective fourth quarters of 2016 and 2015. See Note 16 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s fourth quarter effective income tax rate on earnings attributable to Snap-on was 30.8% in 2016 and 31.1% in 2015. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $146.3 million, or $2.47 per diluted share, in the fourth quarter of 2016 increased $14.9 million, or $0.25 per diluted share, from 2015 levels. Net earnings attributable to Snap-on in the fourth quarter of 2015 were $131.4 million or $2.22 per diluted share.

Segment Results

Commercial & Industrial Group

 

     Fourth Quarter         
(Amounts in millions)    2016      2015      Change  

External net sales

       $   218.5                 76.3%               $   212.0                 75.2%               $      6.5                   3.1%       

Intersegment net sales

     67.8             23.7%             69.8             24.8%             (2.0)            -2.9%       
  

 

 

       

 

 

       

 

 

    

Segment net sales

     286.3             100.0%             281.8             100.0%             4.5             1.6%       

Cost of goods sold

     (170.9)            -59.7%             (174.2)            -61.8%             3.3             1.9%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     115.4             40.3%             107.6             38.2%             7.8             7.2%       

Operating expenses

     (71.5)            -25.0%             (65.7)            -23.3%             (5.8)            -8.8%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 43.9             15.3%               $ 41.9             14.9%               $ 2.0             4.8%       
  

 

 

       

 

 

       

 

 

    

 

 

 

   2016 ANNUAL REPORT    35


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Segment net sales of $286.3 million in the fourth quarter of 2016 increased $4.5 million, or 1.6%, from 2015 levels, reflecting a $6.5 million, or 2.4%, organic sales gain and $4.2 million of acquisition-related sales, partially offset by $6.2 million of unfavorable foreign currency translation. The organic sales increase primarily includes a high single-digit gain in the segment’s European-based hand tools business and a low single-digit increase to customers in critical industries, largely as a result of higher sales to the military. These organic sales gains were partially offset by a mid single-digit decline in the segment’s power tools operations and a low single-digit decline in the segment’s Asia/Pacific operations.

Segment gross profit of $115.4 million in the fourth quarter of 2016 compared to $107.6 million last year. Gross margin of 40.3% in the quarter improved 210 bps from 38.2% last year primarily due to benefits from higher sales and savings from RCI initiatives, and 100 bps of favorable foreign currency effects.

Segment operating expenses of $71.5 million in the fourth quarter of 2016 compared to $65.7 million last year. The operating expense margin of 25.0% in the quarter increased 170 bps from 23.3% last year primarily due to higher costs, including operating expenses for Car-O-Liner and Sturtevant Richmont, a 70 bps benefit realized in the fourth quarter of 2015 from a gain on the sale of a former manufacturing facility, and 10 bps of unfavorable foreign currency effects.

As a result of these factors, segment operating earnings of $43.9 million in the fourth quarter of 2016, including $1.8 million of favorable foreign currency effects, increased $2.0 million from 2015 levels. Operating margin for the Commercial & Industrial Group of 15.3% in the fourth quarter of 2016 improved 40 bps from 14.9% last year.

Snap-on Tools Group

 

     Fourth Quarter         
(Amounts in millions)    2016      2015      Change  

Segment net sales

       $   417.5             100.0%               $   411.2             100.0%               $   6.3             1.5%       

Cost of goods sold

       (242.0)            -58.0%               (237.5)            -57.8%               (4.5)            -1.9%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     175.5             42.0%             173.7             42.2%             1.8             1.0%       

Operating expenses

     (102.0)            -24.4%             (101.8)            -24.7%             (0.2)            -0.2%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 73.5             17.6%               $ 71.9             17.5%               $ 1.6             2.2%       
  

 

 

       

 

 

       

 

 

    

Segment net sales of $417.5 million in the fourth quarter of 2016 increased $6.3 million, or 1.5%, from 2015 levels, reflecting a $12.2 million, or 3.0%, organic sales gain partially offset by $5.9 million of unfavorable foreign currency translation. The organic sales increase includes a low single-digit gain in the company’s U.S. franchise operations and a mid single-digit gain in the company’s international franchise operations.

Segment gross profit of $175.5 million in the fourth quarter of 2016 compared to $173.7 million last year. Gross margin of 42.0% in the quarter declined 20 bps from 42.2% last year as 60 bps of unfavorable foreign currency effects were partially offset by benefits from higher sales.

Segment operating expenses of $102.0 million in the fourth quarter of 2016 compared to $101.8 million last year. The operating expense margin of 24.4% in the quarter improved 30 bps from 24.7% last year primarily due to sales volume leverage.

As a result of these factors, segment operating earnings of $73.5 million in the fourth quarter of 2016, including $3.8 million of unfavorable foreign currency effects, increased $1.6 million from 2015 levels. Operating margin for the Snap-on Tools Group of 17.6% in the fourth quarter of 2016 improved 10 bps from 17.5% last year.

 

 

 

36    SNAP-ON INCORPORATED   


Table of Contents

 

 

 

Repair Systems & Information Group

 

     Fourth Quarter         
(Amounts in millions)    2016      2015      Change  

External net sales

       $   253.8             79.4%                $  228.5                 81.4%                $   25.3          11.1%        

Intersegment net sales

     66.0             20.6%              52.1             18.6%              13.9          26.7%        
  

 

 

       

 

 

       

 

 

    

Segment net sales

     319.8                 100.0%              280.6             100.0%              39.2          14.0%        

Cost of goods sold

       (166.8)            -52.2%                (149.6)            -53.3%                (17.2)         -11.5%        
  

 

 

       

 

 

       

 

 

    

Gross profit

     153.0             47.8%              131.0             46.7%              22.0          16.8%        

Operating expenses

     (70.5)            -22.0%              (58.9)            -21.0%              (11.6)         -19.7%        
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 82.5             25.8%                $ 72.1             25.7%                $ 10.4              14.4%        
  

 

 

       

 

 

       

 

 

    

Segment net sales of $319.8 million in the fourth quarter of 2016 increased $39.2 million, or 14.0%, from 2015 levels, reflecting a $24.6 million, or 8.9%, organic sales gain and $19.1 million of acquisition-related sales, partially offset by $4.5 million of unfavorable foreign currency translation. The organic sales increase includes a double-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, a mid single-digit increase in sales to OEM dealerships and a low single-digit gain in sales of undercar equipment.

Segment gross profit of $153.0 million in the fourth quarter of 2016 compared to $131.0 million last year. Gross margin of 47.8% in the quarter improved 110 bps from 46.7% last year primarily due to benefits from higher sales and savings from RCI initiatives.

Segment operating expenses of $70.5 million in the fourth quarter of 2016 compared to $58.9 million last year. The operating expense margin of 22.0% increased 100 bps from 21.0% last year primarily due to 90 bps of impact from the Car-O-Liner acquisition.

As a result of these factors, segment operating earnings of $82.5 million in the fourth quarter of 2016, including $1.7 million of unfavorable foreign currency effects, increased $10.4 million from 2015 levels. Operating margin for the Repair Systems & Information Group of 25.8% in the fourth quarter of 2016 improved 10 bps from 25.7% last year.

Financial Services

 

     Fourth Quarter         
(Amounts in millions)    2016      2015      Change  

Financial services revenue

       $   74.2                 100.0%               $   63.1                 100.0%               $      11.1          17.6%       

Financial services expenses

       (22.6)            -30.5%               (18.1)            -28.7%             (4.5)         -24.9%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 51.6             69.5%               $ 45.0             71.3%               $ 6.6                14.7%       
  

 

 

       

 

 

       

 

 

    

Financial services revenue of $74.2 million in the fourth quarter of 2016 increased $11.1 million, or 17.6%, from $63.1 million last year primarily reflecting $9.6 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $1.3 million of increased revenue from higher average yields on finance receivables, partially offset by $0.1 million of lower revenue from lower average yields on contract receivables. In the fourth quarters of 2016 and 2015, the respective average yield on finance receivables was 18.2% and 17.8%, and the respective average yield on contract receivables was 9.3% and 9.5%. Originations of $260.3 million in the fourth quarter of 2016 increased $8.3 million, or 3.3%, from 2015 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $22.6 million in the fourth quarter of 2016 increased from $18.1 million last year primarily due to changes in both the size of the portfolio and in the provisions for credit losses. As a percentage of the average financial services portfolio, financial services expenses were 1.3% and 1.2% in the fourth quarters of 2016 and 2015, respectively.

 

 

 

   2016 ANNUAL REPORT    37


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Financial services operating earnings of $51.6 million in the fourth quarter of 2016, including $0.6 million of unfavorable foreign currency effects, increased $6.6 million, or 14.7%, from 2015 levels.

See Note 1 and Note 3 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s fourth quarter 2016 general corporate expenses of $23.8 million increased $0.2 million from $23.6 million last year primarily due to higher acquisition-related and other costs partially offset by $1.6 million of lower pension expense.

2015 vs. 2014

Results of operations for 2015 and 2014 are as follows:

 

(Amounts in millions)    2015     2014     Change  

Net sales

       $   3,352.8                100.0%              $   3,277.7                100.0%              $        75.1            2.3%       

Cost of goods sold

       (1,704.5)           -50.8%              (1,693.4)           -51.7%            (11.1)           -0.7%       
  

 

 

     

 

 

     

 

 

   

Gross profit

     1,648.3            49.2%            1,584.3            48.3%            64.0            4.0%       

Operating expenses

     (1,053.7)           -31.5%            (1,048.7)           -32.0%            (5.0)           -0.5%       
  

 

 

     

 

 

     

 

 

   

Operating earnings before financial services

     594.6            17.7%            535.6            16.3%            59.0            11.0%       

Financial services revenue

     240.3            100.0%            214.9            100.0%            25.4            11.8%       

Financial services expenses

     (70.1)           -29.2%            (65.8)           -30.6%            (4.3)           -6.5%       
  

 

 

     

 

 

     

 

 

   

Operating earnings from financial services

     170.2            70.8%            149.1            69.4%            21.1            14.2%       
  

 

 

     

 

 

     

 

 

   

Operating earnings

     764.8            21.3%            684.7            19.6%            80.1            11.7%       

Interest expense

     (51.9)           -1.4%            (52.9)           -1.5%            1.0            1.9%       

Other income (expense) – net

     (2.4)           -0.1%            (0.9)           –                   (1.5)           NM          
  

 

 

     

 

 

     

 

 

   

Earnings before income taxes and equity earnings

     710.5            19.8%            630.9            18.1%            79.6            12.6%       

Income tax expense

     (221.2)           -6.2%            (199.5)           -5.7%            (21.7)               -10.9%       
  

 

 

     

 

 

     

 

 

   

Earnings before equity earnings

     489.3            13.6%            431.4            12.4%            57.9            13.4%       

Equity earnings, net of tax

     1.3            –                   0.7            –                   0.6            NM          

Net earnings

     490.6            13.6%            432.1            12.4%            58.5            13.5%       

Net earnings attributable to noncontrolling interests

     (11.9)           -0.3%            (10.2)           -0.3%            (1.7)           -16.7%       
  

 

 

     

 

 

     

 

 

   

Net earnings attributable to Snap-on Inc.

       $ 478.7            13.3%              $ 421.9            12.1%              $ 56.8            13.5%       
  

 

 

     

 

 

     

 

 

   

 

NM: Not meaningful

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

Snap-on’s 2015 fiscal year contained 52 weeks of operating results. Snap-on’s 2014 fiscal year contained 53 weeks of operating results. The impact of the additional week of operations in fiscal 2014 was not material to Snap-on’s full year 2014 net sales or net earnings.

Net sales of $3,352.8 million in 2015 increased $75.1 million, or 2.3%, from 2014 levels, reflecting a $220.8 million, or 7.1%, organic sales gain and $12.0 million of acquisition-related sales, partially offset by $157.7 million of unfavorable foreign currency translation.

 

 

 

38    SNAP-ON INCORPORATED   


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Gross profit of $1,648.3 million in 2015 compared to $1,584.3 million in 2014. Gross margin of 49.2% in 2015 improved 90 bps from 48.3% in 2014 primarily due to benefits from higher sales and savings from RCI initiatives, as well as 20 bps of lower restructuring costs. Restructuring costs included in gross profit were zero and $5.7 million in 2015 and 2014, respectively.

Operating expenses of $1,053.7 million in 2015 compared to $1,048.7 million in 2014. The operating expense margin of 31.5% in 2015 improved 50 bps from 32.0% in 2014 primarily due to sales volume leverage and savings from RCI initiatives, partially offset by 20 bps of higher pension expense. Restructuring costs included in operating expenses were zero and $0.8 million in 2015 and 2014, respectively.

Operating earnings before financial services of $594.6 million in 2015, including $39.5 million of unfavorable foreign currency effects, increased $59.0 million, or 11.0%, as compared to $535.6 million in 2014. As a percentage of net sales, operating earnings before financial services of 17.7% in 2015 improved 140 bps from 16.3% in 2014.

Financial services revenue of $240.3 million in 2015 compared to revenue of $214.9 million in 2014. Financial services operating earnings of $170.2 million in 2015, including $2.6 million of unfavorable foreign currency effects, increased $21.1 million, or 14.2%, as compared to $149.1 million in 2014. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.

Operating earnings of $764.8 million in 2015, including $42.1 million of unfavorable foreign currency effects, increased $80.1 million, or 11.7%, from $684.7 million in 2014. As a percentage of revenues, operating earnings of 21.3% in 2015 improved 170 bps from 19.6% in 2014.

Interest expense of $51.9 million in 2015 decreased $1.0 million from $52.9 million in 2014. See Note 9 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $2.4 million and $0.9 million in 2015 and 2014, respectively. See Note 16 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 31.7% in 2015 and 32.1% in 2014. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $478.7 million, or $8.10 per diluted share, in 2015 increased $56.8 million, or $0.96 per diluted share, from 2014 levels. Net earnings attributable to Snap-on in 2014 were $421.9 million or $7.14 per diluted share.

Exit and Disposal Activities

Snap-on did not record any costs for exit and disposal activities in 2015; Snap-on recorded $6.5 million of costs for exit and disposal activities in 2014. See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.

Segment Results

Commercial & Industrial Group

 

(Amounts in millions)    2015      2014      Change  

External net sales

       $   895.5             77.0%               $   952.1             81.0%               $     (56.6)            -5.9%       

Intersegment net sales

     268.1             23.0%             222.7             19.0%             45.4             20.4%       
  

 

 

       

 

 

       

 

 

    

Segment net sales

       1,163.6             100.0%               1,174.8                 100.0%             (11.2)            -1.0%       

Cost of goods sold

     (717.1)            -61.6%             (725.1)            -61.7%             8.0             1.1%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     446.5             38.4%             449.7             38.3%             (3.2)            -0.7%       

Operating expenses

     (277.1)            -23.8%             (291.1)            -24.8%             14.0             4.8%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 169.4             14.6%               $ 158.6             13.5%               $ 10.8             6.8%       
  

 

 

       

 

 

       

 

 

    

 

 

 

   2016 ANNUAL REPORT    39


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Segment net sales of $1,163.6 million in 2015 decreased $11.2 million, or 1.0%, from 2014 levels, reflecting $75.3 million of unfavorable foreign currency translation partially offset by a $64.1 million, or 5.8%, organic sales gain. The organic sales increase primarily included a double-digit gain in the segment’s power tools operations and high single-digit increases from both the segment’s European-based hand tools business and Asia/Pacific operations; sales to customers in critical industries were essentially flat, as sales gains in several market segments were generally offset by lower sales to customers in the oil and gas sector of our natural resources market segment.

Segment gross profit of $446.5 million in 2015 compared to $449.7 million in 2014. Gross margin of 38.4% in 2015 improved 10 bps from 38.3% in 2014, as savings from RCI initiatives were partially offset by a shift in sales that included higher volumes of lower gross margin products, including increased sales from the segment’s power tools and Asia/Pacific operations. Restructuring costs included in gross profit were zero and $1.0 million in 2015 and 2014, respectively.

Segment operating expenses of $277.1 million in 2015 compared to $291.1 million in 2014. The operating expense margin of 23.8% in 2015 improved 100 bps from 24.8% in 2014 primarily due to benefits from the sales shift noted above and a 20 bps gain from the sale of a former manufacturing facility. Restructuring costs included in operating expenses were zero and $0.4 million in 2015 and 2014, respectively.

As a result of these factors, segment operating earnings of $169.4 million in 2015, including $7.7 million of unfavorable foreign currency effects, increased $10.8 million from 2014 levels. Operating margin for the Commercial & Industrial Group of 14.6% in 2015 improved 110 bps from 13.5% in 2014.

Snap-on Tools Group

 

(Amounts in millions)    2015      2014      Change  

Segment net sales

       $   1,568.7                 100.0%               $   1,455.2                 100.0%               $       113.5             7.8%       

Cost of goods sold

     (885.7)            -56.5%             (824.9)            -56.7%             (60.8)            -7.4%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     683.0             43.5%             630.3             43.3%             52.7             8.4%       

Operating expenses

     (427.0)            -27.2%             (407.2)            -28.0%             (19.8)            -4.9%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 256.0             16.3%               $   223.1             15.3%               $ 32.9                 14.7%       
  

 

 

       

 

 

       

 

 

    

Segment net sales of $1,568.7 million in 2015 increased $113.5 million, or 7.8%, from 2014 levels, reflecting a $154.2 million, or 10.9%, organic sales gain partially offset by $40.7 million of unfavorable foreign currency translation. The organic sales increase included double-digit gains in both the company’s U.S. and international franchise operations.

Segment gross profit of $683.0 million in 2015 compared to $630.3 million in 2014. Gross margin of 43.5% in 2015 improved 20 bps from 43.3% in 2014 primarily due to benefits from higher sales and savings from RCI initiatives, partially offset by 90 bps of unfavorable foreign currency effects.

Segment operating expenses of $427.0 million in 2015 compared to $407.2 million in 2014. The operating expense margin of 27.2% in 2015 improved 80 bps from 28.0% in 2014 primarily due to sales volume leverage.

As a result of these factors, segment operating earnings of $256.0 million in 2015, including $21.3 million of unfavorable foreign currency effects, increased $32.9 million from 2014 levels. Operating margin for the Snap-on Tools Group of 16.3% in 2015 improved 100 bps from 15.3% in 2014.

Repair Systems & Information Group

 

(Amounts in millions)    2015      2014      Change  

External net sales

       $   888.6             79.8%               $   870.4             79.5%               $     18.2                   2.1%       

Intersegment net sales

     224.6             20.2%             224.8             20.5%             (0.2)            -0.1%       
  

 

 

       

 

 

       

 

 

    

Segment net sales

       1,113.2                   100.0%               1,095.2                  100.0%             18.0             1.6%       

Cost of goods sold

     (594.4)            -53.4%             (590.9)            -54.0%             (3.5)            -0.6%       
  

 

 

       

 

 

       

 

 

    

Gross profit

     518.8             46.6%             504.3             46.0%             14.5             2.9%       

Operating expenses

     (245.4)            -22.0%             (253.1)            -23.1%             7.7             3.0%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 273.4             24.6%               $ 251.2             22.9%               $ 22.2             8.8%       
  

 

 

       

 

 

       

 

 

    

 

 

 

40    SNAP-ON INCORPORATED   


Table of Contents

 

 

 

Segment net sales of $1,113.2 million in 2015 increased $18.0 million, or 1.6%, from 2014 levels, reflecting a $51.8 million, or 4.9%, organic sales gain and $12.0 million of acquisition-related sales, partially offset by $45.8 million of unfavorable foreign currency translation. The organic sales increase primarily included mid single-digit gains in sales of undercar equipment, sales to OEM dealerships, and sales of diagnostic and repair information products to independent repair shop owners and managers.

Segment gross profit of $518.8 million in 2015 compared to $504.3 million in 2014. Gross margin of 46.6% in 2015 improved 60 bps from 46.0% in 2014 primarily due to contributions from higher sales and savings from RCI initiatives, and 40 bps of lower restructuring costs. These gross margin improvements were partially offset by a shift in sales that included higher volumes of lower gross margin products, including increased essential tool and facilitation sales to OEM dealerships. Restructuring costs included in gross profit were zero and $4.7 million in 2015 and 2014, respectively.

Segment operating expenses of $245.4 million in 2015 compared to $253.1 million in 2014. The operating expense margin of 22.0% in 2015 improved 110 bps from 23.1% in 2014 primarily due to sales volume leverage, including benefits from the sales shift noted above, and savings from RCI initiatives. Restructuring costs included in operating expenses were zero and $0.4 million in 2015 and 2014, respectively.

As a result of these factors, segment operating earnings of $273.4 million in 2015, including $10.5 million of unfavorable foreign currency effects, increased $22.2 million from 2014 levels. Operating margin for the Repair Systems & Information Group of 24.6% in 2015 improved 170 bps from 22.9% in 2014.

Financial Services

 

(Amounts in millions)    2015      2014      Change  

Financial services revenue

       $   240.3                  100.0%               $   214.9                  100.0%               $     25.4                   11.8%       

Financial services expenses

     (70.1)            -29.2%             (65.8)            -30.6%             (4.3)            -6.5%       
  

 

 

       

 

 

       

 

 

    

Segment operating earnings

       $ 170.2             70.8%               $ 149.1             69.4%               $ 21.1             14.2%       
  

 

 

       

 

 

       

 

 

    

Financial services revenue of $240.3 million in 2015 increased $25.4 million, or 11.8%, from $214.9 million in 2014 primarily reflecting $23.0 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $2.2 million of increased revenue from higher average yields on finance receivables. In 2015 and 2014, the average yield on finance receivables was 17.8% and 17.6%, respectively, and the average yield on contract receivables was 9.5% in both years. Originations of $993.7 million in 2015 increased $105.1 million, or 11.8%, from 2014 levels.

Financial services expenses of $70.1 million in 2015 compared to $65.8 million in 2014. As a percentage of the average financial services portfolio, financial services expenses were 4.8% and 5.1% in 2015 and 2014, respectively.

Financial services operating earnings of $170.2 million in 2015, including $2.6 million of unfavorable foreign currency effects, increased $21.1 million, or 14.2%, from 2014 levels.

See Note 1 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s general corporate expenses in 2015 of $104.2 million increased $6.9 million from $97.3 million in 2014 primarily due to $7.9 million of higher pension expense.

Non-GAAP Supplemental Data

The following non-GAAP supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing the operating performance of Snap-on Incorporated’s (“Snap-on”) non-financial services (“Operations”) and “Financial Services” businesses.

 

 

 

   2016 ANNUAL REPORT    41


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

The supplemental Operations data reflects the results of operations and financial position of Snap-on’s tools, diagnostic and equipment products, software and other non-financial services operations with Financial Services on the equity method. The supplemental Financial Services data reflects the results of operations and financial position of Snap-on’s U.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings and cash generated from Operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Income taxes are charged to Financial Services on the basis of the specific tax attributes generated by the U.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the Consolidated Financial Statements.

Non-GAAP Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2016, 2015 and 2014 is as follows:

 

    Operations*     Financial Services  
(Amounts in millions)   2016     2015     2014     2016     2015     2014  

Net sales

      $ 3,430.4              $ 3,352.8              $ 3,277.7              $ –                 $ –                 $ –          

Cost of goods sold

       (1,720.8)             (1,704.5)             (1,693.4)           –               –               –          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,709.6            1,648.3            1,584.3            –               –               –          

Operating expenses

    (1,054.1)           (1,053.7)           (1,048.7)           –               –               –          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings before financial services

    655.5            594.6            535.6            –               –               –          

Financial services revenue

    –               –               –               281.4            240.3            214.9       

Financial services expenses

    –               –               –               (82.7)           (70.1)           (65.8)      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings from financial services

    –               –               –               198.7            170.2            149.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

    655.5            594.6            535.6            198.7            170.2            149.1       

Interest expense

    (51.9)           (51.4)           (52.2)           (0.3)           (0.5)           (0.7)      

Intersegment interest income (expense) – net

    72.2            62.7            56.7            (72.2)           (62.7)           (56.7)      

Other income (expense) – net

    (0.7)           (2.4)           (0.8)           0.1            –               (0.1)      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes and equity earnings

    675.1            603.5            539.3            126.3            107.0            91.6       

Income tax expense

    (197.7)           (181.9)           (165.8)           (46.6)           (39.3)           (33.7)      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before equity earnings

    477.4            421.6            373.5            79.7            67.7            57.9       

Financial services – net earnings attributable to Snap-on

    79.7            67.7            57.9            –               –               –          

Equity earnings, net of tax

    2.5            1.3            0.7            –               –               –          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

    559.6            490.6            432.1            79.7            67.7            57.9       

Net earnings attributable to noncontrolling interests

    (13.2)           (11.9)           (10.2)           –               –               –          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Snap-on

      $ 546.4              $ 478.7              $ 421.9              $ 79.7              $ 67.7              $ 57.9       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

* Snap-on with Financial Services on the equity method.

 

 

 

42    SNAP-ON INCORPORATED   


Table of Contents

 

 

 

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2016 and 2015 year end is as follows:

 

     Operations*      Financial Services  
(Amounts in millions)    2016      2015      2016      2015  

ASSETS

           

Current assets:

           

Cash and cash equivalents

       $ 77.5               $ 92.7               $ 0.1               $ 0.1       

Intersegment receivables

     15.0             15.9             –                 –           

Trade and other accounts receivable – net

     598.2             562.2             0.6             0.3       

Finance receivables – net

     –                 –                 472.5             447.3       

Contract receivables – net

     7.9             8.0             80.2             74.1       

Inventories – net

     530.5             497.8             –                 –           

Prepaid expenses and other assets

     122.4             111.5             1.1             1.2       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     1,351.5             1,288.1             554.5             523.0       

Property and equipment – net

     423.8             412.1             1.4             1.4       

Investment in Financial Services

     288.7             251.8             –                 –           

Deferred income tax assets

     49.1             40.6             23.7             19.8       

Intersegment long-term notes receivable

     584.7             398.7             –                 –           

Long-term finance receivables – net

     –                 –                 934.5             772.7       

Long-term contract receivables – net

     11.2             12.1             275.5             254.5       

Goodwill

     895.5             790.1             –                 –           

Other intangibles – net

     184.6             195.0             –                 –           

Other assets

     47.9             49.9             0.1             1.0       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

       $   3,837.0               $   3,438.4               $   1,789.7               $   1,572.4       
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Snap-on with Financial Services on the equity method.

 

 

 

   2016 ANNUAL REPORT    43


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information (continued):

 

     Operations*      Financial Services  
(Amounts in millions)    2016      2015      2016      2015  

LIABILITIES AND EQUITY

           

Current liabilities:

           

Notes payable and current maturities of long-term debt

       $ 151.4               $ 18.4               $ 150.0               $ –           

Accounts payable

     170.3             148.2             0.6             0.1       

Intersegment payables

     –                 –                 15.0             15.9       

Accrued benefits

     52.8             52.1             –                 –           

Accrued compensation

     85.7             86.9             4.1             4.1       

Franchisee deposits

     66.7             64.4             –                 –           

Other accrued liabilities

     292.1             277.4             22.8             25.0       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     819.0             647.4             192.5             45.1       

Long-term debt and intersegment long-term debt

     –                 –                 1,293.5             1,260.4       

Deferred income tax liabilities

     13.1             14.1             –                 0.2       

Retiree health care benefits

     36.7             37.9             –                 –           

Pension liabilities

     246.5             227.8             –                 –           

Other long-term liabilities

     86.5             80.5             15.0             14.9       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     1,201.8             1,007.7             1,501.0             1,320.6       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity attributable to Snap-on

     2,617.2             2,412.7             288.7             251.8       

Noncontrolling interests

     18.0             18.0             –                 –           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     2,635.2             2,430.7             288.7             251.8